Cryptocurrency-backed derivatives are beginning to gain real traction. To better understand how this new trend is emerging, what it means, and why it is happening now, ETHNews spoke with executives at CoinShares and the TABB Group.
Cryptocurrency exchanges allow people to buy, sell, or exchange their crypto coins. Like cryptocurrency itself, the exchanges that facilitate these transactions can sometimes be hard to understand, especially when you consider their inner workings. For all intents and purposes, a crypto-exchange fulfills the same role as a fiat exchange, but they have no connective tissue or link between each other. They are wholly separate and as distinct as the crypto and fiat moneythey support. However, fiat exchanges may have a role to play in helping cryptocurrencies reach mass adoption.
If mass adoption is ever going to be realized, the emerging world of crypto-finance will have to incorporate battle-tested exchanges with rock-solid crypto coin protocols. If there was another way to promote exposure to prominent cryptos by using proven fiat exchanges, cryptocurrencies could take an important step toward the goal of ubiquity by simply skipping over the layers of technical friction that keep many would-be investors at bay. That’s where CoinShares and Nasdaq come in.
Nasdaq is a New York City-based company comprised of several fiat exchanges around the world. The Armenian Stock Exchange, Copenhagen Stock Exchange, Helsinki Stock Exchange, Iceland Stock Exchange, Riga Stock Exchange, Tallinn Stock Exchange, Nasdaq OMX Vilnius, and the Stockholm Stock Exchange are all owned and operated by Nasdaq. Nasdaq Stockholm has emerged as a leader in securities trading for Nordic countries and lists over 300 companies. This is the exchange that could change how people invest in cryptos like Ether.
CoinShares, Nasdaq Stockholm, And The Ether ETN
XBT Provider, a CoinShares-owned company is offering new exchange-traded notes (ETNs). The new ETNs are available on the same exchange that XBT Provider pioneered cryptocurrency price trackers on over two years ago, Nasdaq Stockholm. In 2015, before CoinShares had acquired XBT Provider, XBT Provider had launched the first cryptocurrency ETNs, Bitcoin Tracker One and Bitcoin Tracker Euro, (COINXBT:SS and COINXBE:SS). These financial products track the price of an underlying asset (in this case, bitcoin) and gain or lose value relative to that base asset. Now, CoinShares is using the past expertise of XBT Provider to bring another ETN to market via Nasdaq Stockholm, Ether Tracker One and Ether Tracker Euro (COINETH:SS and COINETHE:SS).
ETHNews asked Ryan Radloff, co-founder and principal at CoinShares, how he got into the crypto-ETN space and why it took two extra years to issue ETNs for Ether. “I got involved in CoinShares because I saw this growing trend of the blockchain becoming more and more important in the world of finance. Specifically, the native tokens and coins that exist within these blockchains as a new and emerging asset class. If you look at the existing legacy financial system, there needs to be appropriate portals and debt for purpose vehicles that can enable capital to flow into this space. There are plenty of smart developers who are working on making these blockchains more useful. Obviously, no protocol has better core developers than Ethereum, but there aren’t enough people that are going out and explaining the investment pieces of these tokens to the legacy financial system. We felt that was the opportunity for us as a business to help aid in the development of crypto-finance. Ethereum, two years ago, was certainly not in the same place it is today. When you think of a regulated exchange like Nasdaq as an issuer, what we have to take into consideration is how well-off the secondary markets – the exchanges – are. How deep and liquid are some of these new cryptocurrencies? How readily available and accessible are they?”
Nasdaq Stockholm is a regulated exchange with a huge global presence. If you have a brokerage account that has exposure to Nasdaq, you can add exposure to your portfolio using these new exchange-traded products. That’s why the Ether ETNs are significant. They provide investors from all over the world access to Ether as a derivative in a way they are familiar with. Radloff continued: “As an issuer and management company, we don’t solicit or market business to people in the United States directly, but we certainly have people in the United States who use [investment platforms] to purchase certificates. We believe in the underlying thesis of Ethereum and the direction it is going, but these things take time. You have to work with all the clearing authorities, the counterparties, the exchanges ... it is a tremendous amount of work to get people comfortable with anything new. I think the concept of having exchange-traded products that are built on top of these cryptocurrencies has an immediate business model right now. However, if you look at what the core technology of Ethereum is bringing to the table, Ethereum itself and the decentralized applications that are being built on top of it, have the opportunity of completely dismantling all of the exchanges in which we may be listing products on in the first place ... crypto out-competes [fiat] in usefulness and in every facet important to a civilization moving away from analog into digital.”
A Brand New Asset Class Called Cryptocurrency
Derivatives are indeed coming to cryptocurrency. For context, CME Group, one of the world’s largest derivatives marketplaces, handles around three billion contracts worth approximately $1 quadrillion annually. There is indeed a huge space for cryptocurrency-based derivatives like CoinShares’ Ether ETNs to grow into. To better understand the derivatives space and the emerging interconnectivity between fiat exchanges and crypto-derivatives, ETHNews spoke with Anthony Perrotta, CEO of the TABB Group with over twenty years’ experience in derivatives markets. Perrotta told ETHNews, “Derivatives markets develop as an adjacency to the acceptance and adoption of ‘cash markets,’ to enhance liquidity, hedging, and overall risk management options. While cryptocurrency markets are garnering much attention in media circles, they have only recently been addressed by banking firms and have not caught the attention of institutional investment managers. The development of an underlying cash market with structured governance could create tons of opportunity [for cryptocurrencies] and the emergence of a derivatives market that enhances and supports the underlying assets. But this will only come to fruition as the asset moves out of the realm where it currently resides. Derivatives, by their very nature, are an extension of the underlying assets they enhance. Therefore, the likelihood that derivatives on cryptocurrencies will gather momentum is predicated on the legitimacy of this new asset class becoming a widely adopted form of currency and then demonstrating an ability to maintain value through various outcomes. Risk always has an element of tolerance; if the market will tolerate the volatile nature of a burgeoning asset class, then the risks associated with the development of [cryptocurrency] derivatives will be evaluated in the context of the broader tolerance for the underlying asset.”