What is a crypto asset?

Crypto assets, or cryptocurrencies, are commonly compared with traditional currency, or fiat. Currency (e.g USD, EUR, GBP) is regulated by a central bank, which is a centralized system. Crypto assets are however based on blockchain, which is a decentralized system. A key characteristic of crypto assets is that it spreads risk and provides stable transactions.

A common example of crypto asset is Bitcoin. Bitcoin, compared to traditional financial products, is highly volatile.

Because of such high volatility, Bitcoin is frequently compared with Options, which are derivatives. The price of an option can be determined using various formulas (Delta, Gamma, Vega, Theta, Rho), which takes into account the volatility of options. Options are currently one of the most popular derivative products.

Options are financial instruments that are derivatives based on the value of underlying securities such as stocks (Investopedia)

Formula for Delta, Theta, Rho, Vega

Implications of crypto assets

Many securities firms are utilizing options to construct various financial products such as ELS (Equity-Linked-Securities)and DLS (Derivative-Linked-Securities). These products are widely purchased by hedge funds, as these funds invest in risky products like options. Because of this, hedge funds naturally seek to manage volatility and risk while constructing their portfolios. As crypto assets can be seen compared to options, crypto assets can be a potential investment to these hedge funds.

Existing institutional investors are stepping away from traditional financial products such as equity and bonds, which can be seen as investments into underlying assets that are represented as equity or bonds. Financial Engineering has become a recent trend, in which new products such as derivatives, equity & bond hybrids, alternative investments are being “engineered”.

Let us take a look at alternative investments. Alternative investments include real estate, commodity, gold assets or derivatives linked to these underlying assets. As alternative investments refer to financial assets that do not fall in the “conventional” category (equity, income, cash), crypto assets can be added in an alternative investment portfolio. By integrating crypto assets into these alternative investment portfolios, there can be new demand for crypto assets overall.