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Crypto custody for advisors
Cryptocurrency custody can be a difficult topic, as investors and advisors are faced with many options when considering the storage, security, and accessibility of digital assets. In today’s main article, Todd Bendellof Amphibian Capital, discusses the different custody options financial advisors should be aware of.
Meredith Yarbrough by LaHoja Capital Partners answers questions about Bitcoin custody and collateral in today’s Ask an Expert conference.
–SM
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Crypto custody for financial advisors
In the dynamic world of cryptocurrencies, strategic foresight is a necessity. Financial advisors seeking to navigate this volatile landscape must understand the full spectrum of crypto custody options, balancing innovation and risk management to optimize client portfolios.
Self-Guard: The Ultimate Control
Opting for self-care means holding the reins of responsibility. This approach involves securing private keys through cold storage – hardware wallets isolated from online threats. It’s a fortress of solitude for cryptography, providing maximum security but requiring technical acumen. For the savvy investor or privacy-conscious individual, self-custody is best suited to those who value absolute control over their digital assets.
Custody in exchange: convenience with socket
The convenience of exchange custody cannot be overstated. Cryptocurrencies remain easily accessible, facilitating rapid transactions. However, this method is not without pitfalls: security is only as strong as the weakest link in the platform. There is a paradox here: the more convenient the access, the greater the vulnerability. THE FTX collapse highlighted potential vulnerabilities and the importance of selecting platforms with strong, transparent security practices and regulatory compliance. Advisors must therefore choose platforms with military-grade security protocols, but even the most fortified castles have fallen.
Off-exchange solutions: institutional insurance
For those managing large assets, off-exchange custody solutions represent a strategic chess game. This type of agreement may include additional layers of verification by involving a third party in authorizing transactions, in line with the strict requirements of institutional investors. It represents a strategic blend of old-fashioned banking security and the efficiency of new technologies.
Investing in Crypto Quant funds
Venturing into quantitative crypto funds offers a compelling narrative. These funds use algorithms for high-frequency trading and other market-neutral strategies, potentially reducing risk through diversification and sophisticated strategies. This method can enable diversified, long-term exposure to flagship cryptocurrencies while minimizing the typical complexities and risks associated with direct management and custody of crypto assets.
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Navigating the Regulatory Landscape
Advisors must also master the complexities of the regulatory frameworks governing digital assets. The landscape is as politically nuanced as it is technologically advanced, requiring a careful balance between compliance and strategic innovation.
Final Thoughts
In summary, integrating cryptocurrencies into investment portfolios requires a confluence of knowledge, strategic acumen, and a thorough understanding of risk. The paths of self-custody, exchange custody and innovative off-exchange solutions offer diverse strategies that meet different needs. Whether owning assets directly or investing in algorithm-driven funds, the key lies in leveraging these tools to achieve superior results, which echo the philosophy of strategic and bold innovation of digital assets.
– 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?
Credit fund managers prioritize minimizing business risks when selecting a custodian for Bitcoin collateral. Since Bitcoin collateral is typically held for the life of the loan, custodians are evaluated for their long-term viability, including their auditing practices and business continuity plans. Safety is also a major concern; Managers evaluate both general security policies and specific procedures tailored to bitcoin, as well as additional services the custodian might offer. The biggest challenge in choosing a custodian is the lack of standardization, as many institutions are modernizing traditional frameworks to include Bitcoin programs.
Q. How does Bitcoin collateral custody differ from traditional asset custody?
While there are common concerns such as cybersecurity risks for both traditional and digital assets, bitcoin custody comes with unique challenges. For example, cyber risks associated with digital assets can potentially translate into physical risks due to unauthorized access to keys. Competent Bitcoin custodians mitigate this risk by implementing robust key ceremony procedures, in which keys controlling assets are distributed across multiple geographic locations with strict protocols governing their access and use.
Q. Is it possible to insure Bitcoin assets?
It is possible to obtain insurance for Bitcoin assets, although this is not a common practice among credit managers who manage Bitcoin collateral, which is similar to the lack of standard insurance policies for assets traditional financial institutions. Instead, managers rely heavily on strict security protocols and existing regulatory frameworks to protect these assets.
– Meredith Yarbrough, Managing Partner, La Hoja Capital Partners LLC
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Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.