Crypto Prime lacks teeth without lending

Just when the prime brokerage business in crypto was starting to see some traction, the rug was pulled out from under it.

Why it’s important: For the crypto market to go from a trillion to “trillions”, it needs prime brokerage – the business that facilitates sophisticated trading and attracts the Big Money crowd, such as hedge funds.

The big picture: There is no crypto equivalent to the power brokers in traditional finance, Goldman Sachs and Morgan Stanley. No one matches their size or offers a suite of services as comprehensive.

• But there has been an ongoing effort to build against it, with varying degrees of success. (Read: Coinbase, Binance, FTX, BitGo, Genesis Global)

Zoom out: The origin story of crypto prime brokerage is that it first emerged to solve the market inefficiencies of digital asset price divergence across crypto exchanges.

• But to bring in the whales on Wall Street, more had to be done. It needed to provide custody services, route and execute trades, enable capital raising and – key to it all – lend.
• And lending is where the money is for prime brokers.

Be smart: Lending enables leveraged trading – trading borrowed money and using it to accumulate potential returns.

• It is also used for shorting, or placing a trade in anticipation of prices falling (as opposed to rising).

The last: But then Terra happened and Three Arrows Capital collapsed.

• “Lending has dried up,” Noelle Acheson, who recently left Genesis to start an independent macro-focused newsletter, tells Axios. (It’s pretty typical: risk management controls are being tightened after an ugly incident.)

Status: Crypto prime brokerage is now just order routing, with no lending activity.

• “If it’s not borrowing and lending, you need custody and trading,” Adam Sporn, head of prime brokerage and institutional sales at BitGo, told Axios.
• “People are positioning their businesses for when more leverage starts to take place.”

What you should see: With the third quarter in the rearview mirror, some institutions are planning for an “all clear signal,” according to Matt Hougan, chief investment officer at Bitwise Asset Management.

• “We talk to institutions and financial advisors every day and [they’re] completing due diligence on the idea of ​​awarding in 2023. Major broker-dealers are approving more and more crypto funds and the questions we’re getting – compared to 2018’s ‘is this a Tulip Bubble’ – are “should I buy now?”

Bottom line: Prime brokerage will be key for crypto when lending returns.

• “This is a big deal for crypto brokers because there are a lot fewer institutions that have access to the kind of leverage that they’re used to,” Acheson said.