The crypto landscape has significantly transformed since the dramatic collapse of FTX in 2023, which resulted in substantial losses for investors. However, industry experts assert that there is still much work to be done to fortify the sector against future risks. This was a key takeaway from the “Views From Wall Street to Crypto” event held during Consensus Hong Kong.
The Shift Toward Traditional Practices
According to Gautam Sharma, CEO and CIO of Brevan Howard, traditional financial players are increasingly entering the crypto realm. “Most of our trading is now conducted through exchange settlements, where assets are held with custodians while trading occurs on exchanges,” he explained. Over the past 18 months, technological advancements have made significant progress, but Sharma emphasizes that the journey toward a more resilient crypto ecosystem is far from complete.
The Imperative of 24/7 Risk Management
One of the critical points raised by Sharma was the necessity for continuous risk management. This encompasses various types of risks, including market, counterparty, and credit risks.
Understanding Counterparty Risk
Counterparty risk refers to the danger that one party in a transaction may default on their obligations, resulting in financial losses for the other party. This risk is notably heightened in the cryptocurrency space, largely due to the lack of intermediaries like banks or clearinghouses that facilitate trust and settlement. This concern is particularly relevant for both directional and non-directional arbitrage traders.
Fabio Frontini, founder of Abraxas Capital Management, echoed this sentiment, stating, “For us, counterparty risk is the most critical factor when we engage in arbitrage.” He also highlighted the significant role of credit risk in these transactions.
The Role of Stress Testing in Risk Management
Frontini emphasized the importance of conducting stress testing simulations. He pointed to the perpetual futures market as an example, where traders can lose their margin if their positions are liquidated—a risk not typically found in traditional markets. “When executed correctly, stress testing can yield substantial rewards,” Frontini noted.
The Need for Transparency and Liquidity
Mike Kuehnel, CEO of Flow Traders, underscored the importance of making innovation in the crypto space transparent to enhance investor confidence. “Ensuring the availability of data and facilitating liquidity movement without fragmentation is essential,” Kuehnel stated. He added, “Achieving the best price and providing the ability to transact at any moment is a crucial component.”
Liquidity Challenges in the Evolving Market
Liquidity, defined as the market’s capacity to absorb large orders without significantly altering prices, became a pressing concern in the aftermath of the FTX collapse and the subsequent fallout of its affiliate, Alameda. While there has been improvement in the order book depth for major cryptocurrencies, the fragmentation of liquidity across various decentralized finance (DeFi) platforms, blockchains, and networks continues to pose challenges.
In conclusion, while the crypto industry has made strides since the FTX disaster, experts agree that ongoing efforts in risk management, transparency, and liquidity are vital for building a robust and trustworthy market.
