Institutional Challenges in Crypto Asset Portfolio Management
Effective crypto asset portfolio management is proving to be one of the most significant operational challenges for institutional investors in the digital asset sector. Faced with issues such as portfolio fragmentation and a lack of analytical tools, there’s a growing demand among institutions for an integrated crypto intelligence platform with a global dashboard.
Amid what appears to be an extended bear market for crypto assets, institutional adoption continues at pace. A recent Ripple survey found that 76% of over 800 institutional financial leaders said they intend to use cryptocurrencies over the next three years.1 The most common reason cited was its use as a hedging asset.
A previous survey, conducted in 2021 by Fidelity Digital Assets, appears to reinforce the view that cryptocurrency acts as a hedging asset in the institutional portfolio.2 There, respondents cited the high potential upside of cryptocurrencies, along with a lack of correlation to other assets, as two of the most appealing attributes of digital assets.
Barriers to crypto asset adoption
Interestingly, when asked about barriers to crypto asset adoption, more than half of respondents in the Fidelity survey cited volatility as the most significant hurdle. At first glance, this appears to be at odds with the previous responses, as upside opportunity in cryptocurrencies is often a function of price volatility.
However, this apparent contradiction is more understandable in light of the relative immaturity of the institutional digital asset infrastructure currently on the market. Managing the risk of volatility in a global market that operates 24/7 requires highly effective portfolio management. Yet managing a crypto asset portfolio comes with numerous fundamental operational challenges which those who are more accustomed to traditional finance may not anticipate.
Portfolio fragmentation
On a basic level, unlike the traditional equities market, there is no principal exchange in each jurisdiction for digital assets. Purchasing Apple shares in the US, for example, invariably involves transacting via Nasdaq, which captures all the liquidity for that stock in that market (if the stock is not dual-listed). In contrast, with a crypto asset like Bitcoin, liquidity is spread across many centralized and decentralized exchanges. Even the largest among them typically command a much smaller percentage of global liquidity.3 As a result, portfolio managers need to account for the inherent complexity involved in crypto asset management, with holdings spread across multiple exchanges necessitating multiple accounts and digital wallets.
Further compounding this is the requirement to reduce counterparty exposure to centralized exchanges, which requires assets to be moved to and held on a variety of custodial wallets. This requirement is the root cause of portfolio fragmentation, where to manage risk and reduce exposure, assets must be held across multiple sources.
In addition, no two cryptocurrency exchanges or wallets support exactly the same set of tokens and instruments, meaning that a diverse portfolio is invariably fragmented across many exchanges, wallets, and brokerage accounts. Therefore, crypto portfolio monitoring in real time becomes a challenge. Although many of the leading crypto market data tracking services like CoinMarketCap or CryptoCompare do offer basic crypto portfolio tracking services for retail investors, they do not connect to exchange accounts, on-chain wallets, and custodial wallets.
Professional and institutional investors will find these basic tools unfit for purpose as they do not provide the required in-depth institutional-grade, metrics, analytics, and functionalities across both crypto market data and on-chain data in order to measure and monitor portfolios, and proactively manage risk and uncover opportunity.
But adequate, institutional-grade tools for digital asset portfolio management are almost nonexistent today. As a consequence, early adopter funds need to both build and maintain their own crypto data applications using Excel and manage connectivity to their exchange accounts and wallets.
The Challenge: Turning on-chain crypto data into actionable intelligence
In the digital asset space, blockchain data can also provide a rich source of intelligence for investors seeking to enhance their portfolio performance. However, there are still substantial barriers that make it difficult to turn raw data into meaningful intelligence. On-chain data providers do exist, but unless you are content with the selection of charts and data published on their website, you need to manually integrate them into your digital asset dashboard via API calls. These APIs tend to be relatively poorly documented compared to the equivalents in the traditional space and are subject to change as the platforms evolve, which means that more development hours need to be committed to quality control and bug testing.
Furthermore, not all providers support all blockchain networks – or they might provide some analytics for some networks but not others.
Open-source services like Dune Analytics allow anyone to create a custom query to interrogate blockchains, including Ethereum, BNB Chain, Polygon, and others. The user must have at least a basic understanding of how to write SQL queries, however, or else depend on those set up by other users. Ideally, investors would have access to a single, reliable source of on-chain data, metrics, analytics, and insights to understand the key factors driving the performance of cryptocurrencies, which would enable them to create custom queries without a steep learning curve.
With so many gaps across the suite of crypto asset portfolio management tools, investors have had little choice but to try to navigate the sector using a disparate patchwork of services. Typically, the tool stack for managing a digital asset portfolio will involve one provider for on-chain tools and insights, another for crypto market data, a third for scenario modeling, and so on.
With patchy integration between providers, portfolio managers need to amalgamate multiple crypto data and information sources across various platforms and accounts into an overall picture of the portfolio. This might be achieved by manually coding API connections to the underlying accounts or by exporting snapshots of crypto account data into Excel sheets and combining them offline. With such complexity involved in crypto portfolio monitoring, it is unsurprising that institutions still see volatility and portfolio risk as the biggest barriers to digital asset investing. It is almost impossible to obtain a view of the entire crypto investment strategy unless a portfolio manager leaves 100% of their assets on one single centralized exchange.
However, both internal compliance and client mandate rules will prohibit this practice as counterparty exposure would be huge and managers will also not be able to offer “best execution.” Although best execution is not strictly a requirement for digital assets under MiFID, it is expected by institutions investing in cryptocurrencies nevertheless.
Nuant: Centralized crypto intelligence for decentralized assets
Nuant is the first crypto intelligence solution that provides a single view of the portfolio, irrespective of the account and wallet locations of any of the portfolio assets. With in-depth insights from both on-chain and market sources, Nuant offers all of the tools, user metrics and analytics demanded by an institutional portfolio manager, all packaged into a unified interface and user experience.
Investors can directly connect their exchange and wallet accounts to Nuant from major providers such as Coinbase, Fireblocks, Ledger, and Kraken, to name just a few, providing a complete overview of their entire portfolio with accurate reference asset prices for valuation purposes. The platform provides insights into the overall health and status of the portfolio, such as recent price movements and the latest transactions. Users can also drill down into both the portfolio and each asset for further insights into performance and risk.
One standout feature of Nuant is the ease with which anyone can create complex custom queries using our intuitive Domain Specific Language (DSL), which has been developed in-house. DSL is far more straightforward and intuitive than high-level scripting languages like SQL or Python, significantly shortening the learning curve and time needed to create bespoke on- and off-chain analytics tailored to a specific model or market thesis. In addition, portfolio managers, analysts, and quants alike can combine these insights from on-chain data with historical crypto market data to backtest their models, all within a single platform.
In the 24/7 crypto market, Nuant’s technology constantly monitors your portfolio against market conditions to ensure that it complies with your strategy, allocation, and risk guidelines.
Establishing the foundations for effective crypto asset portfolio management
For institutional investors entering the digital asset space, an integrated toolset can make a substantial difference in managing the balance between upside opportunity and downside risk. Nuant provides a comprehensive, consolidated view of the market that considers all relevant data points for effective crypto asset portfolio management. Ultimately, it will allow crypto assets to play a more effective role as both an asset class in its own right as well as an effective hedging tool, increasing its utility for professional investors, institutions, and fund managers alike.
References
- Ripple (2022) An Inside Look at New Value: Crypto Trends in Business and Beyond | Ripple. Available at: https://ripple.com/insights/2022-new-value-report-crypto-trends-in-business-and-beyond/.
- Fidelity Digital Assets (2021) 2021 Institutional Investor Digital Assets Study. Available at: https://www.fidelitydigitalassets.com/research-and-insights/2021-institutional-investor-digital-assets-study.
- Xu, H. (2021) Professional traders need a global crypto sea, not hundreds of lakes, Cointelegraph. Available at: https://cointelegraph.com/news/professional-traders-need-a-global-crypto-sea-not-hundreds-of-lakes.
- Vidal-Tomás, D. (2021) ‘An investigation of cryptocurrency data: the market that never sleeps’, Quantitative Finance, 21(12), pp. 2007–2024. Available at: https://doi.org/10.1080/14697688.2021.1930124.
- Makarov, I. and Schoar, A. (2020) ‘Trading and arbitrage in cryptocurrency markets’, Journal of Financial Economics, 135(2), pp. 293–319. Available at: https://doi.org/10.1016/j.jfineco.2019.07.001.
