The Rise of Crypto Options and Structured Products

Options and structured products are naturally complex and require at least quasi-active management. While the demand for convexity increases, and 0DTE options rise again in the retail consciousness, institutional providers have been quietly advancing the required infrastructure for the non-retail investor base to get involved. These types of structured products give investors a breadth of crypto payoffs while also solving for degrees of customization.

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The problem

The challenge with cryptocurrencies, including crypto instruments, has long been their market structure. Crypto emerged as an exploratory project driven by a small, passionate community seeking to trade an uncertain asset. Consequently, the market infrastructure built to support it was self-centered, unsupervised, and inherently unregulated. Some ongoing issues in crypto, such as fragmented liquidity, inconsistent pricing mechanisms, and significant price differences between trading platforms, are legacy problems that are only now becoming more manageable as the crypto market shifts from being solely retail-driven.

Where we are

An important development in the crypto world that deserves equal attention is providing crypto returns to traditional investors. As more and more investors consider adding crypto to their portfolios, we’ll see a significant shift towards strategic allocation. This shift becomes possible due to the advanced institutional-grade products and delivery systems that have been created, such as ETFs, ETPs, and other non-listed notes.

An additional selection of crypto assets could bring benefits to a diversified investment portfolio. At ARP Digital, we aim to enhance a wider portfolio by creating volatility products from a carefully chosen range of cryptocurrencies.

Volatility Products

Crypto markets are characterized by swift shifts and heightened volatility due to the extreme views of market players, easy access to significant borrowing power, and complex trading structures. Historically, low adoption rates of crypto have stemmed from a self-reinforcing loop: dealers haven’t seen sufficient demand to focus on it, while banks lacked regulatory guidance or incentives to promote it. Consequently, the volatility pattern displayed in the graph from Amberdata illustrates the consequences of insufficient institutional backing and involvement.

Due to the reliance of conventional crypto product delivery methods on connections between crypto market players and conventional intermediaries, several challenges have arisen, leading to significant concessions in areas such as capital utilization and collateral management. These compromises have ultimately decreased investor interest even further.

Conclusion

With the increasing popularity and recognition of bitcoin as a successful investment through spot ETFs, the desire for new products in this asset class is expected to surge. Following the pattern of other asset classes, the crypto structured product sector is likely to experience rapid expansion.

At ARP Digital, we believe that the need for crypto investments offering regular returns and higher risk will persist. Early crypto yield products emerged through unsecured loans given to different market players, which at times were unaware of the risks involved.

After the turbulent financial year of 2022, investors have become more cautious and contemplative about where they can find returns and how to assess the accompanying risks; there’s no getting something for nothing. Luckily, structured products provide predictable yields that can be mathematically calculated based on market conditions, bringing some much-needed tranquility to their financial planning.