XBTO announces acquisition of digital asset custody & trading platform Stablehouse
Acquisition accelerates XBTO’s capability to offer institutional investors a comprehensive suite of digital assets services
Bermuda (10 August 2023) - XBTO Global (XBTO), a comprehensive platform for digital assets and tailored investment solutions, has today announced its strategic acquisition of Stablehouse*, subject to regulatory approval. Stablehouse is the secure digital assets custody and trading platform that helps institutions mitigate risk with security, bankruptcy protection and regulatory compliance.
The acquisition of Stablehouse will power the custody offering of XBTO’s platform, and expands the suite of digital asset services that can be offered to institutional investors. This will now include everything from custody and institutional trading, to asset management, and designated market making. Stablehouse was originally incubated by XBTO Group and was funded by several industry-leading venture capital funds in 2019. In addition to being CEO of Stablehouse, Philippe Bekhazi will now assume the role of CEO of XBTO Global.
“XBTO’s acquisition of Stablehouse represents a significant moment for both companies, in our joint mission to help drive new technologies and services that are key to institutional adoption of digital assets,” commented Philippe Bekhazi, Founder & CEO of XBTO. “In light of the recent turmoil and challenges in the industry, institutions need to trust the underlying security of their digital assets in order to allocate to the asset class with confidence. By acquiring Stablehouse, XBTO is now able to offer a one-stop digital assets platform catered to sophisticated non-US investors and institutions.”
The Stablehouse custody infrastructure incorporates omnibus custody accounts with integrated trading. It also offers segregated vaults where assets are verifiable on the blockchain at all times, and is built upon a warm storage solution where the keys are protected across distributed environments. The platform ensures an end-to-end bankruptcy remote state between custody and trading.
This suite of solutions enables XBTO to bridge the gap between traditional finance and digital assets and offers large institutions access to its white label service that integrates custody and trading for a seamless user experience.
“XBTO’s mission through its regulated subsidiaries is to increase institutional access to digital assets, and develop the digital asset economy which is very much aligned with Stablehouse’s vision. The decision to join forces really was a simple one,” said Michael Chauliac, President and General Manager of Stablehouse. “By working together, we can provide an integrated, comprehensive digital assets platform at a crucial time.”
Both XBTO and Stablehouse are under the oversight of the Bermuda Monetary Authority (BMA), one of the most advanced and robust regulatory frameworks globally. Since its founding in 2015, XBTO has made regulation fundamental to its comprehensive suite of services.
The acquisition is subject to the regulatory approval of the Bermuda Monetary Authority under both the Exchange Control Act and Digital Asset Business Act, and applicable ancillary regulations.
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
