Crypto Investors Ramp Up Risk Management After 2020 Meltdowns | WSAU News/Talk 550 AM · 99.9 FM

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Cryptocurrency investors have become more cautious when doing business, due to the sudden collapses of Celsius Network, Voyager Digital, FTX, and others last year, as well as the fear of a regulatory crackdown. These bankruptcies have left $34 billion worth of customer assets trapped, according to Xclaim.

To protect themselves, institutional investors have adopted new risk management measures, such as switching to exchanges with stronger asset protection, performing more thorough due diligence on trading partners, and executing trades in smaller chunks.

Samed Bouaynaya, a digital asset portfolio manager at Altana Wealth, remarked, “Investors in this asset class have learned their lessons the hard way and now are being much pickier about who to deal with.”

Recently, Binance.US and Coinbase Global were put under the microscope when the U.S. Securities and Exchange Commission (SEC) sued the two for allegedly breaching its rules. It is expected that more enforcement actions will follow. Both Binance and Coinbase have denied the regulator’s allegations.

Altana rarely leaves balances at Binance overnight, since it does not offer Altana the option to settle and hold its assets with independent third-party custodians such as Copper and Fireblocks. Binance has asserted that “customer funds are always safe,” while Coinbase has stated that its assets are secure and the SEC litigation will not affect its operations.

Nickel Digital Asset Management now trades on exchanges that allow off-exchange settlement, a dramatic shift from the 5% prior to FTX’s collapse. According to Martin Lee, data journalist at blockchain tracker Nansen, the declining exchange balances of stablecoins and ether imply that users are withdrawing their assets from exchanges, although it is difficult to determine the proportion that are moving to custody solutions.

Stephen Richardson, managing director at Fireblocks, revealed that there has been a sharp increase in trading companies seeking models to trade on exchanges while safeguarding their capital. Copper also reported a surge in demand for off-exchange settlement.

As a result of the crypto market’s peak value of $3 trillion in 2021 and subsequent price drop due to rising interest rates, investors have become more judicious. CoinShares has increased scrutiny of its trading partners, asking questions about their operations, cybersecurity set-up, credit exposure, and exposure to various cryptocurrencies. The company has also simplified its system to a two-category system of “red or green.”

However, the crypto industry continues to be risky, as financial regulators have observed that many crypto companies fail to comply with the applicable rules, thereby lagging the traditional financial sector. Crypto investor Arca attempts to minimize its exposure to the riskiest exchanges by breaking up big trades into smaller chunks and monitoring Twitter for signs of trouble.

Wes Hansen, Arca’s director of trading and operations, commented, “Everyone’s just so scared in the market right now.” Nickel’s Crachilov added that any further dramatic exchange failures “would perhaps inflict a nuclear crypto winter.”

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