Part III – Digital Asset Technology: Institutional Trading Tools
By: Rikhil Bajaj and Darshan Patel
Introduction to Institutional Trading Technology for Digital Assets
As you might expect, the need for robust, accurate market data as well as portfolio management and best execution tools has driven tremendous spending on trading technology in TradFi. In fact, buyside firms spend an astounding $200B+ annually on trading technology. As institutional adoption in digital assets continues to grow, we expect spending for digital asset trading technology to reach similar relative scale.
The need for this technology is aptly exemplified by the FTX bankruptcy that began in November 2022. While the exact cause of the firm’s demise is open for debate (i.e., fraud, incompetence, or otherwise), the treasury / balance sheet mismanagement that led to the firm’s insolvency could have been prevented with accounting and portfolio management software solutions. Furthermore, as the now-defunct prime broker of choice for many institutions, FTX has directly driven institutional adoption of DeFi. It is yet another example of a centralized broker folding, leaving consumers and institutions alike SOL, pushing savvy market participants to DeFi to avoid a similar fate with centralized brokers & exchanges.
FTX US Balance Sheet (via @SBF_FTX on Twitter): Risk and portfolio management software tools could prevent asset/liability mismatches.
Drivers of Institutional Adoption in Digital Assets
Despite the fallout from the FTX debacle, institutional adoption in digital assets continues to grow. We have identified the following as key drivers of this adoption:
- Regulation: As covered in Part II of this series, the SEC has announced regulation of crypto assets as one of its top priorities for 2023. We view the development of regulatory frameworks domestically and abroad (e.g., the EU’s MiCA regulation) as a boon for digital assets. The risks around an uncertain regulatory environment have kept many institutions on the sidelines to date.
- Diversification & Alpha: After a tumultuous 2022, crypto has rebounded year-to-date with BTC up 70% and ETH up 55%. And perhaps most importantly, BTC and ETH appear to have decoupled from traditional assets with a daily correlation coefficient near 0 with major equity indexes. While unclear if this decoupling will last, it is nonetheless an encouraging indicator that BTC and ETH may serve as a hedge against inflation.
- Applications: Broad and growing set of use cases complemented by proliferation of supporting digital asset technologies (e.g., DeFi, including tokenization of real-world assets, NFTs, payments, security, logistics).
- Accessibility: Ability to gain exposure to crypto via direct ownership or derivatives, with TradFi institutions like Fidelity and JPM now offering crypto-related products.
We’ve segmented the institutional trading tech market into 7 key buckets, categorizing companies based on our view of their most popular use case, but several of these companies could fit into multiple buckets:
- Data/Analytics: There are a range of tools spanning from research-oriented to analytics/trade intelligence-oriented. Messari has built a unique position as one of the leading providers of blockchain research and is increasingly offering analytics capabilities. The Tie is building a holistic tool for institutional users (“Bloomberg for crypto”). Nansen and TRM are often being used for trade intelligence: identifying and evaluating counterparties in a pool. Coin Metrics, Kaiko, and Dune Analytics all offer various forms of market data to traders. Amberdata provides blockchain and digital asset data via API and publishes derivatives/options research.
- Tax and Accounting: These tools deliver software-driven middle- and back-office solutions for asset managers, third-party administrators, TradFi institutions, exchanges, merchants, crypto-native businesses, and consumers. CoinTracker and TaxBit provide automated tax solutions. Lukka, Bitwave, and Cryptio are building blockchain data management capabilities in addition to tax.
- Portfolio Management: This segment may represent a gap in the trading tech ecosystem. Large trading firms such as Genesis and Hidden Road Partners have built their own in-house platforms, creating a potential niche to serve small- to mid-sized funds, especially those with mandates that fall outside of DeFi. Treehouse Finance and xyz offer all-in-one platforms to invest in DeFi protocols and track positions with advanced analytics. Haruko provides both CeFi and DeFi portfolio management tools, in addition to blockchain data and risk monitoring tools.
- Trade Execution: The digital asset trade execution market bifurcates between solutions for centralized and decentralized trading venues. We anticipate growth and eventual consolidation, like the TradFi OEMS market. Bloxroute Labs and Flashbots offer capabilities to trade in private mempools to avoid others frontrunning trades. CoinRoutes and Elwood enable best execution across centralized venues. Talos offers similar capability and enables trading in OTC venues. Paradigm is a specialized solution for derivatives traders.
- Real World Assets: These companies provide on-chain exposure to traditional, real-world assets such as mortgages (Brightvine), home equity loans (Figure), corporate debt (Goldfinch), derivatives (Synthetix), cash/USD (Circle), and higher-yield investment products (Fortunafi).
- Custody: There a broad range of companies offering custody solutions, both as point solutions or within broader platforms. The segment can be bifurcated into self-custody (e.g., Ledger, Qredo, Fireblocks) and third-party custody solutions (e.g., BitGo, Anchorage Digital, Copper). Fireblocks and Copper are creating proprietary settlement networks in addition to their custody solutions.
- Staking & Node Infrastructure: Blockchain infrastructure companies like Blockdaemon, Alchemy, and Bison Trails (acquired by Coinbase) facilitate the creation and management of blockchains for businesses building decentralized applications. Figment provides staking infrastructure for institutions via its API, as well as direct staking tools for managing positions. Staked enables exposure to staking yield without asset custody.
Why Work with Tarsadia Investments?
Tarsadia Investments is a $2B+ firm that makes high-conviction investments in category-defining companies globally. We’ve invested across stages from idea to public ownership, with often a decade-plus investment horizon. We use our domain expertise in financial services and technology to support founders on growth, talent and M&A/capital raising.
Please reach out to us if you are:
- Building a digital asset technology company. We often engage with founders outside the fundraising cycle, sharing insights and introductions within our network. We invest in series A and beyond, writing checks from $5M – $75M.
- An experienced leader looking to advise or invest in digital asset technology companies.
- A financial institution, web 2.0 or web 3.0 business looking to work with digital asset technology companies.
Cold outreach welcome on LinkedIn.