Crypto Derivatives Traders Worry About Their Counterparties: Survey

It is probably no surprise, given the events of the last year in the crypto industry, that the latest Acuiti Crypto Derivatives Management Insight Report finds that participants in the market are holding less money at exchanges, onboarding with third-party custody providers and calling for greater regulation of crypto-native markets.

Following a series of failures in the crypto industry – most notably FTX – the survey, which is produced in collaboration with Digital Asset Research (DAR) and Cloudwall and based upon a quarterly survey of a group of over 70 executives from asset managers, hedge funds, sell-side firms, and proprietary trading groups active in trading crypto derivatives, finds that over three-quarters of respondents thought there would be a permanent separation of exchange and custody functions as investors look to reduce concentration risk.

Ironically, given how one of the initial crypto “benefits” was freedom from regulation and oversight, almost as many respondents predicted a heightened regulatory response. Elsewhere, around a third predicted consolidation among native crypto markets, a shift of liquidity to onshore regulated markets or to OTC markets.

The collapse of FTX was not seen as reducing institutional participation in crypto markets – just 14% of respondents thought it would, something seen as reflecting the ongoing resilience of the industry as it goes through its challenging formative years – or a head in the sand approach as some others would have it!

Since the collapse of FTX, Acuiti says several crypto derivatives exchanges have published proof-of-reserves to reassure investors of their client fund management processes, however, 64% of respondents said that they remained concerned with the quality of proof-of-reserves from most exchanges.

In addition, counterparty risk remained a key concern with 47% saying that they were very concerned with this risk factor compared with 31% for operational risk, 13% liquidity risk and just 6% for market risk.

The survey also found what Acuiti says is “strong demand” for a volatility index in crypto derivatives markets, provided it references more than just Bitcoin; and that optimism is high for a recovery in digital assets markets over the next three months with 75% either quite or very optimistic about the quarter ahead.

It also found that firms are lowering maximum exchange exposures and diversifying exposures across exchanges following the collapse of FTX. Following that event, the report also finds almost half of firms are planning an investment in risk management the next 12 months. The findings also suggested a move away from in-house builds as the quality and sophistication of third-party software available to the market continues to increase.

“This quarter’s report demonstrates the resilience of the crypto derivatives market as it recovers from an immensely challenging year,” says Will Mitting, founder of Acuiti. “With every challenge the market has faced in its short existence, it has come back stronger and strengthened the foundations.”