It’s Not About Crypto Volatility: Institutions Need Better Data
Institutional investors have historically thrived on reliable market intelligence — a fundamental weapon that is still missing from their crypto investment armory
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Institutional crypto adoption has soared in the past few years. Many corporations now hold BTC and other crypto assets on their balance sheets, crypto exchanges like Coinbase have gone public, while the world’s largest fund manager Blackrock now offers a private bitcoin trust. However, a significant chunk of institutional capital still sits on the sidelines, with the global crypto market currently valued at circa $1 trillion. For context, the global equity market is valued at $120 trillion.
In a 2021 survey by Fidelity Digital Assets, 54% of surveyed institutional investors cited volatility as a critical barrier to entering the crypto market. A closer analysis however reveals that concerns around volatility stem from a lack of market intelligence. For instance, even though studies show that bitcoin is less volatile than many S&P 500 stocks, many institutions still perceive the leading cryptocurrency as being nascent and volatile.
Institutional investors have historically thrived on reliable market intelligence — a fundamental weapon that is still missing from their crypto investment armory. The largely fragmented and unregulated nature of the crypto market makes it difficult for institutional players to tap into on-chain data to understand the correlated reasons behind price action and position their portfolios accordingly.
In this piece, we dive deeper into the challenges hindering the availability of reliable crypto market intelligence & data for institutional players. Understanding and addressing these bottlenecks invariably opens the crypto industry to more institutional adoption and value growth in the years ahead, with specialized crypto-native fintechs such as Nuant providing digital asset managers with the right tools and contextualized data intelligence in order to overcome these challenges.
Bottlenecks to crypto market intelligence data and its impact on institutional players
Fragmented custody solutions
The inherent security risks of holding cryptocurrencies require institutions to develop sophisticated in-house storage solutions or use third-party custodial solutions such as Fireblocks or Coinbase Custody. Although this simple approach works for longer-term portfolio management, it has significant obstacles for the larger population of institutional investors operating actively-managed discretionary and systematic funds.
In the cryptocurrency industry, institutions lack the depth of global liquidity found in traditional equity markets. Portfolio managers must therefore source liquidity from a fragmented pool of centralized and decentralized exchanges — rife with counterparty and timing execution risks. For example, best price trade execution often requires the PM to move digital assets between third party custodial solutions, exchanges accounts and wallets — exposing the PM to market-timing risks and costs with each transfer. The barrier is further compounded by the lack of interoperability across blockchain networks for DeFi execution, requiring the movement of funds across risk-prone bridging solutions.
Institutional portfolio managers need to actively manage and monitor their assets from a total portfolio perspective in relation to the market and its movements. They need to combine this single view of all the assets in the portfolio with real time market data and deep insights into on-chain data and the drivers and correlations between them to truly manage risk and uncover opportunity. The complication for digital asset portfolio managers is that in order to reduce counterparty risk whilst achieving best-execution, the assets which make up the portfolio need to be held across a myriad of centralized exchange accounts, on chain wallets and custodial solutions. Managers have therefore been left to rely on rudimentary portfolio tracking applications or invest themselves into the development and on-going support of in-house tools to understand not just deep analytics for monitoring and decision-support but in many cases, to just get a mark-to-market for the whole portfolio once or twice a day, in a market that is always on, 24/7.
Institutions therefore require a cutting-edge solution to manage portfolios from a single platform view, irrespective of locations of the accounts and wallets holding the portfolio assets. Such an institutional-grade tool would enable the real-time visualization of valuable on-chain data alongside market data and analytics for asset managers to measure the risks and opportunities accurately.
Barriers to on-chain data utilization
Blockchain data provides market intelligence to enable digital asset investors to optimize their portfolio performance. However, such intelligence is hard to access even at the basic level. There is no authoritative source for primary data, such as asset prices, as these are quoted differently on various exchange platforms.
Additionally, existing on-chain data sources are fragmented and extremely difficult to bring together in a centralized location to build actionable insights with real meaning and gain a holistic overview for investment decision support. Institutions must therefore rely on themselves to manually integrate on-chain data through complex API documentation to code and build custom insights and analytics, thereby increasing the time and development effort required to access such data for meaningful use.
Portfolio managers also usually need to maintain several different subscriptions with on-chain analytics providers and rely on the dashboards provided by these platforms. Any attempt to create customized data visualizations using open-source tools like Dune Analytics would at least require experience in writing SQL queries to query blockchain networks. In many cases, tools do not exist to query these new-age networks, limiting access to on-chain data.
Without sophisticated portfolio management solutions, it is nearly impossible for institutions to get a 360° view of their crypto investment strategy or use on-chain data to their competitive advantage. This bottleneck also delays the formation of predictive analytic models, another valuable data-based element institutional investors need to thrive.
Lack of predictive analytic models
Predictive analytic models in investing refer to the use of historical data and algorithms to make reliable predictions on the performance of an asset or strategy. At the basic level, investors can model specific economic scenarios to determine associated risks and opportunities using probabilistic distribution measures.
For instance, Wall Street analysts provide largely accurate earnings forecasts on companies by considering metrics such as historical stock prices, sales volume, production costs, industry growth, and macroeconomic factors. Compared to the traditional finance industry, the cryptocurrency market is relatively new, presenting a primary challenge for companies sizing up allocations to the sector without any real fundamental analysis to back up their assumptions
It is difficult to accurately evaluate fundamentals for cryptocurrency projects or predict their future price action, with most projects only existing for under five years. In most cases, institutions must rely on simple evaluation models as used in traditional finance, such as company profiles, user metrics, and product-market fit.
Industry consensus is that predictive analytic models for crypto assets will significantly improve as the market matures and more historical data becomes available. In the meantime, institutional-grade cryptocurrency portfolio management solutions like Nuant empower institutions to tap into a curated and condensed sampling of key on-chain insights and metrics along with price and volume data to build what-if scenarios that boost portfolio returns.
How Nuant unlocks superior crypto market intelligence for institutions
Nuant is an integrated solution that enables institutional professionals to resolve the bottlenecks associated with managing cryptocurrency portfolios. Nuant provides a single interface for portfolio managers to view real-time institutional-grade data, analytics, and research material tailored to their portfolio composition. Clients can connect multiple exchange and wallet accounts across blockchain networks to monitor portfolio performance at the total portfolio level
Nuant’s approach to data management for both its proprietary on-chain data service and leading 3rd party market data, integrated into the core platform, saves crypto portfolio managers valuable time that would otherwise go into rigorous data cleansing, normalization and integration of multiple data feeds from on-chain data providers. Nuant also supports custom analytics and model creation using its own query language, enabling clients to use its data to create, backtest and implement proprietary models that generate alpha whilst managing risk and maximizing returns.
This content is sponsored by Nuant.
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