Post-FTX, Institutions Need A Better Toolbox for Diversification and Smart Risk Management
Founded in 2019, FTX rapidly rose to be one of the top three centralized cryptocurrency exchanges by volume. Now, as even those with little interest in cryptocurrency know, the company is bankrupt, most likely due to the reckless abuse and manipulation of customer assets. FTX’s convincing veneer of regulatory compliance led many big and small market participants to throw caution to the wind and treat FTX as a safe harbor for the bulk of their assets.
Diversification is one of the most fundamental risk-management strategies that digital asset investors must learn. Unfortunately, in the crypto space, diversification is often limited to the diversity of digital assets held in a single wallet, provider, execution layer, or exchange. Such investors are still placing all of their eggs in one basket, leaving themselves open to single points of failure like FTX, putting their funds at risk. Real diversification requires a much broader analysis of the digital asset ecosystem and blockchain technologies: there are many blockchains, with plenty of wallet options, as well as many CeFi and DeFi exchanges, each offering distinct pros and cons. As FTX customers have learned, simply opting for the one exchange that appears to have the highest reputation is not good enough.
As a result of the recent crypto market chaos, which caused a crisis in trust for CeFi exchanges and liquidity providers, retail and institutional participants have withdrawn a large amount of digital assets, storing their digital assets in private wallets and self-custody wallets, observing industry events closely and ‘sitting on the bench’.
In spite of the fact that decentralized finance is likely to be the first choice for retail investors, traditional investors will likely use regulated and verified CeFI providers first before proceeding to more mature DeFi exchanges and protocols.
As for DeFi exchanges specifically and web3 protocols in general, they have undergone an unprecedented stress-test due to the market-wide turmoil triggered by the Three Arrows (3AC) and FTX collapse, and they have only demonstrated their resilience and strength in the process. When the dust settles, institutional investors will have a dizzying array of web3 solutions and strategies to choose from. Given the current chaotic vacuum in the crypto market, regulated TradFi has the best entry point and opportunity to step in and regain investors’ trust, which in turn will bring fresh oxygen and funds to steadily grow and scale the crypto trading industry.
At this point, Institutions and key Web 3.0 industry players should collaborate to create risk distribution governance standards that will enable better safeguarding of customers’ digital asset funds. The service providers will need to change their overly centralized structures and approaches, and should enable full control, monitoring and transparency of customers’ funds at any given moment, plus enable Institutional clients to have the flexibility and mobility to use a mix of multiple services and solutions from any service providers to cater to a more secure and trusted business environment for every level and layer of the transaction lifecycle. Implementing a gateway as a web 2.5 orchestration layer with multiple entry points to crypto DeFi and CeFi will be the key to success.
In this context, Crymbo offers just what the industry needs at this time of turmoil. Crymbo has developed the omni toolbox to ensure that asset managers can be as secure and flexible with their diversification strategy as possible, and easily track, manage and distribute their assets across multiple providers (protocols, blockchains, wallets, exchanges, execution layers). While smart risk-management strategies may be challenging to formulate, Crymbo makes it much easier to put such strategies into practice, and modify them in real time as market conditions change. As institutional asset managers entering web3 investment seek to diversify and manage the risks, Crymbo provides a hassle-free gateway to secure and scalable digital asset management.
Learn more about the Crymbo solution by scheduling a demo: http://crymbo-6710275.hs-sites.com/schedule-a-demo