Enhanced Risk Management Will Help Crypto to Grow Sustainably

The first quarter of 2021 is undeniably one for the history books in the cryptocurrency markets. With increased innovation, institutional adoption, and a friendlier stance from regulators, we’ve already seen most major cryptocurrencies marking new all-time highs.

Not many people expected a $58K BTC all-time-high at this juncture in the journey.

Yet, it’s already happened. And with institutions adjusting their portfolios to include cryptocurrencies, we need to work on retaining their interest in this asset class. Enhanced risk management capability is a major way to help us do this.

Institutional Investors Are Pouring In

Now that Bitcoin has passed the $1 trillion market cap for the first time in history, this is only the beginning.

More and more investors are recognizing cryptocurrency as a viable alternative asset class and, as the gold-bitcoin ratio hits an all-time low, BTC, as digital gold is now a serious contender as a store of value.

With the market cap of gold standing at around $11 trillion, BTC may have some ways to go – although, as the saying goes, the first trillion is always the hardest.

Of course, not all these institutional dollars will be allocated to high-risk trading strategies such as margin and derivatives trading. The likes of Tesla and MicroStrategy restructuring their corporate treasuries to include BTC is due to a combination of its undeniable ability for capital appreciation – and an ever-weakening decline in the purchasing power of the dollar.

Yet, all these moves from massive corporations and banking institutions, from Mastercard, PayPal, and BNY Mellon to Square and Tesla all serve to further legitimize the space. And, as such, we’re seeing a major uptick in professional and institutional traders with a higher appetite for risk.

This class of traders needs enhanced risk management tools to execute creative and flexible trading strategies that can successfully cushion losses and amplify rewards.

Advanced Risk Management Tools

Risk management is the key element of success for any trader in any market. With $8K candles in either direction and 20% corrections in 24 hours, learning to manage risk is essential.

But beyond basic stop-losses and limit orders, we’re talking about institutional-grade products like Portfolio Margin (PM) that are almost entirely absent from the crypto space right now.

If cryptocurrency exchanges are serious about sustainably accommodating the needs of this type of investor, they must be willing to adapt their offering to provide advanced risk management tools that institutional and pro traders require.

Portfolio Margin (PM), otherwise known as Unified Account, gives traders the ability to cross-collateralize positions and effectively manage their risk. They can manage all accounts and trades from within one single interface, which allows them to place all their focus on trading, rather than operational overhead. 

Even more significantly, they can decide to unify all their assets and trade with any instrument. In other words, use all their purchasing power to amplify potential gains.

This also means that traders don’t need to own the actual crypto asset in order to be able to trade it. So, for example, say a trader wanted to trade BTC/USD futures but all his assets were spread across USDT and ETH. Through his unified account, he could simply use his ETH and USDT crypto collateral without having to purchase BTC first.

This is a far more efficient and convenient way for frequent traders to strike while the iron is hot and act quickly on any trade. They can also avoid the extra payment of fees involved with buying additional crypto assets and have the freedom to take a far larger position (and risk) by substantially improving margin efficiency.

Closing Thoughts

Unified Account has previously only been available to high-net-worth individuals with more capital and trading experience through select prime brokers. But just as crypto has democratized the world of investing, advanced risk management tools are now allowing all traders to gain access to smarter risk management.

Since risk management is the single most important element in success, it’s vital that exchanges invest in this type of infrastructure in the future. Not only will we be able to retain the interest of professional and institutional traders but we’ll be sustainably growing the crypto space, allowing for maximum flexibility and gains – and propelling the BTC market cap well beyond the first trillion.

Do your own research and you can reach great results too.

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