Trading Digital Assets on an Institutional Level Is Broken and Risky. But It Pays

By Jeff Bone, Managing Partner at NextPrime

Institutional penetration into digital asset markets has been lacklustre at best. This reticence comes with good reason. As it stands now, trading significant volumes of digital assets is extremely expensive, operationally risky and produces major capital inefficiencies.

But the reason digital asset trading remains broken and risky for institutional and professional traders is because it pays, for some, to keep the system that way. Notice how the huge arbitrage spreads in crypto trading maintain a directional and persistent spread. It’s not an accident, it’s a priced-in structural deficiency that’s taken advantage of by a few select players.

First, let’s talk about why it’s so challenging. For example, a fund seeking to take advantage of these structural arbitrage opportunities might have to post up to $100 million in aggregate collateral across 10 exchanges for only $10 million in aggregate buying power, while having to wait days for traditional currency settlement and missing trading opportunities while money moves in and out of the market.

Barriers exist on the exchange side as well. The market structure for digital assets is unique since exchanges both match trades and take deposits for trading collateral. Therefore, intense competition arises between exchanges who must attract deposits.

While this has lead to a proliferation of different exchanges, this disjointedness has meant that achieving the daily trading volumes that institutions usually do in other asset classes is virtually impossible. As a result, many exchanges are shut out of potential volume because of the structural immaturity of the ecosystem at large.

Custodian Scarcity

Custody is top of mind for traders as well. A main reason why hedge funds participating in the crypto and digital asset space are still only a fraction of the total number of funds (160-180 out of 5,500 hedge funds) is that custodians experienced in the space are scarce and are often located in not-entirely-trustworthy jurisdictions.

That’s enough to turn any professional or institutional trader off of trading digital assets. The truth is that the business ecosystem for trading at scale is simply not mature enough to handle significant volume. In the absence of serious institutional participation so far, it’s clear that the institutional future of crypto has yet to arrive.

But it doesn’t have to be this way. What is needed now is a networked, prime brokerage-like solution to clear the way for the entry of institutional money into digital asset trading by addressing two major pain points: elimination of capital fragmentation through trusted custodianship and fast, trustworthy clearing and settlement.

The solution is straightforward: first, place capital into a single pool handled by a regulated, first world custodian or service bank to access buying power quickly and as-needed. This would make buying power unified and easily accessible, including for short or hedge positions. Second, near real-time clearing and settlement of trades, netted appropriately and allowing the fiat components of digital asset trades to be resolved in similar timeframes to the non-fiat component would dramatically reduce risk throughout the entire ecosystem.

As Binance’s CEO Changpeng Zhao recently stated, 60% of crypto trading is still retail. When the operational and cultural floodgates to digital asset trading at scale are removed, the institutional money that will pour in will push prices to levels that are currently impossible in a retail-majority environment.

In short: it’s time to grow the pie instead of fighting for breadcrumbs. It’s time to work together and remove the structural impediments to institutional digital asset trading at scale—it’s possible right now and it will benefit all players in the market.


Jeff Bone is the Head of Product and a Managing Partner at NextPrime, a company that accelerates capital efficiency for digital asset markets. Previously, he built and ran the foreign exchange and fixed income desks at RGM Advisors, a global proprietary trading firm. As a serial entrepreneur his prior companies have been acquired by General Magic, IBM and CMGI. Jeff is an experienced investor who has been actively involved with cryptocurrencies since 2010; his notable seed stage investments include Coinbase.