Crypto Custody for Advisors

In today’s “Ask an Expert” session, Bitcoin specialist Meredith Yarbrough from LaHoja Capital Partners is ready to address queries regarding the safekeeping of Bitcoins and the concept of collateral associated with this digital currency.

–S.M.

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Crypto Custody for Financial Advisors

In the ever-changing realm of cryptocurrencies, it’s crucial for financial advisors to have a forward-thinking perspective. To effectively guide clients through this unpredictable market, they need a thorough grasp of various crypto custody solutions. Striking a balance between embracing new opportunities and managing risks is essential to maximizing the potential of diversified investment portfolios.

Self-Custody: The Ultimate Control

Choosing to hold the keys to your own cryptocurrency is equivalent to taking full charge of the responsibility that comes with it. This method involves safeguarding your private keys using offline storage solutions, such as hardware wallets, which are shielded from potential online risks. It represents a secure stronghold for your digital assets, offering ultimate security at the expense of requiring advanced technical skills. Suitable for experienced investors or individuals who value utmost privacy and control over their crypto holdings.

On-Exchange Custody: Convenience with a Catch

The advantage of keeping your cryptocurrencies in on-exchange wallets is undeniable. They’re easily accessible and enable quick transactions. However, this convenience comes with risks – security depends on the platform’s strongest measures. This creates a conundrum: the more convenient the access, the greater the risk. The FTX incident served as a stark reminder of these vulnerabilities and the need to choose secure and transparent platforms. Advisors must therefore select those with top-notch security features and regulatory compliance. However, no platform is completely impenetrable – even the strongest fortresses have been breached at some point.

Off-Exchange Solutions: Institutional Assurance

For individuals overseeing significant financial holdings, opting for off-exchange custody is a smart tactic. This approach incorporates extra security measures through the inclusion of a third party in transaction approvals, catering to the rigorous expectations of institutional investors. It offers an effective combination of traditional banking security and modern technological advancements.

Investing in Crypto Quant Funds

As a crypto investor, I find the allure of investing in quant funds in the crypto space to be quite intriguing. By putting my trust in these funds, I can leverage their sophisticated algorithms designed for high-frequency trading and market-neutral strategies. This approach offers potential risk reduction through diversification and advanced techniques, enabling me to maintain a long-term investment exposure to prominent cryptocurrencies without the usual complications of managing individual assets and dealing with custody issues.

Navigating the Regulatory Landscape

Experts in the field of advisory services need to have a deep understanding of the intricate regulatory environments surrounding digital assets. This terrain is not only technologically sophisticated but also politically complex, demanding a careful navigation between adhering to regulations and fostering groundbreaking innovations.

Concluding Thoughts

In essence, adding cryptocurrencies to your investment mix entails possessing a blend of expertise, tactical skills, and risk awareness. The choices between self-storage, exchange custody, and avant-garde off-exchange alternatives present distinct approaches tailored to various preferences. Regardless of whether you opt for personally managing assets or investing in intelligent automated funds, the secret is utilizing these resources effectively to secure optimal results – a testament to digital currencies’ pioneering spirit of audacious, forward-thinking advancement.

– Todd Bendell, co-founder and managing partner, Amphibian Capital

Ask an Expert

Q. What do credit fund managers look for when choosing a custodian for bitcoin collateral assets?

As a researcher studying the selection process for fund managers when it comes to choosing a custodian for bitcoin collateral, I’ve found that prioritizing risk minimization is crucial. Since this collateral is usually held for the entire loan term, assessing a custodian’s long-term viability becomes essential. I examine their audit practices and business continuity plans closely to ensure safety and reliability.

Q. How does custody of bitcoin collateral differ from traditional asset custody?

Although cybersecurity threats exist for both conventional and digital assets, the safekeeping of bitcoin presents distinct difficulties. For instance, the cyber risks relating to digital assets may lead to physical risks if unauthorized individuals gain access to the private keys. Skilled bitcoin custodians address this issue by implementing rigorous key ceremony protocols. These procedures involve distributing the keys that manage the assets among various geographic locations and enforcing stringent rules for their handling and utilization.

Q. Is it possible to insure bitcoin assets?

Insurance coverage for Bitcoin assets can be obtained, although it’s less common among credit managers dealing with Bitcoin collateral compared to traditional financial assets. In essence, there aren’t many standard insurance policies tailored for this digital currency yet. Instead, these managers primarily depend on robust security measures and existing regulatory frameworks to safeguard their Bitcoin holdings.

– Meredith Yarbrough, Managing Partner, La Hoja Capital Partners LLC

Keep Reading

As a seasoned crypto investor, I’d like to share an alternative perspective on the market trends that I’ve been observing. While my personal viewpoints may not align with those of CoinDesk or its associates, I believe it’s essential to encourage open discussions within our vibrant community. Stay tuned as I delve deeper into the subject matter from my unique vantage point.