In this article, Chief Innovation Officer Jonathan de Wet explains the frameworks behind Zerocap’s service of how to buy and sell any cryptocurrency ever created; the key advantages, how it works, the current structural challenges that crypto markets face and why our model provides a better way to access them.
The crypto markets have mimicked the early days of the Foreign Exchange market in many ways. FX is an over-the-counter (OTC) market that was fragmented across banks and various distribution channels for retail customers. After the global financial crisis, we saw proprietary trading and technology firms enter the space, bringing tighter pricing and efficiency to the FX markets. These days, arbitrage is all but impossible in the FX market given the advances in technology and liquidity. This is not the case yet for cryptocurrency – there are close to 400 exchanges worldwide, and liquidity is fragmented across them all. Some tokens appear on one exchange, some on many, but none on all. Mispricing and arbitrage is still rife across the space, and although we are seeing the likes of Citadel, Susquehanna and Jane Street all entering the arena, the fragmented liquidity and lack of depth across alternative coins still exists, and will for at least a few more years as the industry matures.
Key challenges that this market structure presents
Most centralised exchanges (CEX), and all decentralised exchanges (DEX – those that operate on the blockchain without a centralised intermediary), are unregulated. This presents key issues around the governance that underpins processes and security in these firms, and the limited recourse if something goes wrong. Unfortunately, exchanges pool assets in hot wallets, which presents a hacking risk to funds. The offshore jurisdiction and corporate structure of these exchanges create challenges for firms requiring tier-1 protection and security.
For investors that are looking for opportunities beyond the top 20 cryptocurrencies by market cap, there are no exchanges that “have them all”. To have a token listed on a centralised exchange is a lengthy and expensive process. As a result, the industry has grown horizontally (more exchanges) instead of vertically (more tokens and offerings per exchange). This presents a challenge for investors wanting access to a wide range of cryptocurrencies. Signing up to dozens of exchanges to execute trade ideas is onerous and capital intensive.
Having multiple exchanges in the arsenal presents another challenge – capital efficiency. In order to trade, investors need to provide collateral at these exchanges, presenting increasing counterparty risk, and decreasing capital efficiency as funds are split across dozens of venues.
The depth of liquidity at any one exchange for assets is generally insufficient for orders above $20,000. Aggregated or market-making (firm) liquidity is generally required to solve this problem. However, most investors do not have the technology or access to institutional market makers to access this liquidity.
A better way to access crypto markets
Our customers trade a wide variety of cryptocurrencies, and are really able to buy and sell any cryptocurrency. Many outside the top 20 coins by market cap, and some that are only available on little known centralised and decentralised exchanges. We act as a version of their private bank, providing a white-glove service that offers instant access to a large token universe across centralised and decentralised exchanges, and institutional market makers.
How it works
We have credit lines with large institutional liquidity providers and have in-house technology that connects to CEX, DEX, and institutional liquidity – allowing us to aggregate pricing and order flow. We trade across a huge asset universe and offer large order sizes at tight pricing to our customers. With the ease of simply messaging our team through the wealth portal, and secured by our best-in-class custody infrastructure.
You don’t need to deal with unregulated crypto exchanges, complex order books, and the banking issues that generally come with trading against retail crypto exchanges. You simply jump into our chat on the portal and request a quote, or email us the parameters. Buy and sell any cryptocurrency.
There are some key advantages to this request-for-quote model:
The white glove nature of our business means that you have personalised traders that can assist you at any point of the day. One of our investors mentioned that he loved being able to sit at a Bondi cafe and purchase $250,000 worth of Ethereum on the back of a price move.
Unique order types
We can provide you with a live quote, or we can assist you with other order types.
Limits: If you have a price that you are targeting, you can request that we add a limit order.
Time Weighted Average Price (TWAP): If your coin has low liquidity, you can request that we hedge into the trade over time with a maximum or minimum price cap.
We primarily deal with institutional liquidity streams, and when we need to hedge on-exchange, we do so via off-exchange margin technology, or by limiting the time that we hold assets on these exchanges. We hold coins in our custody infrastructure, which is backed by a unique Lloyds of London insurance policy held by Zerocap. All assets in our custody are governed by sophisticated multi-sig asset movement rules, and recovery keys are sharded and held in bank vaults.
We have an institutional team that runs the trading operations. Toby Chapple used to be Managing Director of Deutsche Bank and ran over $1B at UBS. William Fong headed emerging markets at Westpac and was formerly Director of Global Macro Trading at Deutsche Bank. Leo Shek has had structured experience as a Director of Standard Chartered Bank. Paul Tulloch spent 8-years at Optiver. In addition to our entire trading team who bring huge value to our business and clients.
You’re in good hands – reach out to discuss how we can help you improve your execution, asset universe or structured portfolio needs in the space. We love crypto markets.
Zerocap provides digital asset investment and custodial services to forward-thinking investors and institutions globally. Our investment team and Wealth Platform offer frictionless access to digital assets with industry-leading security. To learn more, contact the team at [email protected] or visit our website www.zerocap.com