What is Prime Broker? How Prime Broker Works
According to Fidelity Digital Assets, more than 40% of institutional investors in the US and Europe are investing in digital assets. Among them, 60% believe that digital assets will be in the portfolio of institutions in the future.
However, a lack of experience and connections in a volatile market like crypto can make investing difficult. Especially, in the context of the cryptocurrency market constantly experiencing crises such as the default of 3AC or the bankruptcy of Voyager, asset management for large institutional investors becomes more important than ever.
What are Prime Broker and Prime Broker in Crypto?
Prime Broker (roughly translated: Prime Broker) is a service package including securities lending, leveraged trading, cash management, etc., provided by investment banks and financial institutions. big in the world. The clients of this service are usually hedge funds and large investment clients who need to borrow stocks and bonds or borrow money to buy stocks and bonds.
Prime Broker acts as an intermediary between hedge funds and two important partners: Pension funds and other institutional investors with shares to lend (for short selling), and commercial banks that have funds available for margin lending. These departments were established in the 1980s.
Some major Prime Brokers in the traditional financial market include Goldman Sachs, Morgan Stanley, Merrill Lynch, UBS, Credit Suisse…
What is Prime Broker in Crypto?
Prime Broker is a collection of tools and services developed to simplify the investment process, provided by organizations such as AMM, cryptocurrency exchanges, liquidity providers… Customers of Prime Broker in Crypto are usually hedge funds or venture capital funds.
Prime Broker is needed because many institutional investors often hold large amounts of assets but lack the in-house resources to manage their investments themselves. Matrixport is one of the major Prime Brokers in crypto, currently serving over 500 institutions worldwide, offering crypto trading and margin lending accounts securely linked to CeFi and DeFi.
Some of the major Prime Brokers in crypto include Hidden Road, Wintermute, Finansiv, Nexo, BitGo, Troy Trade, Quantreq, Tagomi, Caspian…
How does Prime Broker work?
Prime Broker offers a variety of services to assist clients with transactions and asset management, including:
- Custody: Assist in asset protection, credit provision, clearing, transaction execution…
- Market Making/OTC: Provides liquidity for both buyers and sellers.
- Borrow/Lending: Lending assets to customers to increase leverage. Prime Broker also helps clients to “short sell”, which occurs when investors borrow assets to sell them. Prime Broker charges a loan for this service with the total cost including the loan fee and any interest rates agreed in the contract.
- Derivatives: Provides liquidity in crypto derivatives markets, including pricing and restructuring of unusual derivatives contracts.
- Expand Capital: Offers “introduction to capital” services, including setting up meetings and presenting with people who may be interested in investing in clients.
- Research: Provide data, analysis reports, and detailed information about the market… at the request of customers.
- Regulatory Consultant: Keeps clients up to date with all financial regulations.
- Cash management: Collect and manage cash flow. Effective cash management is vital to the stability of any business.
- Prime Broker makes profits from a variety of sources, including fees and commissions. The interest rate differential between borrowing and lending activities also benefits Prime Broker significantly.
Each Prime Broker has its fees. The rates vary based on the client’s trading volume, the number of services used, etc.
Prime Broker may also use client collateral for its investments. This is called “rehypothecation”. In many cases, Prime Broker clients agree to have their collateral used in exchange for reduced fees.
Difference between Prime Broker and Broker?
A broker is a person or organization that facilitates the buying and selling of assets, such as stocks and bonds, for an investment account. Normally, the number of assets needed to own to trade with a broker ranges from 50 USD to 200,000 USD.
Prime Broker is a large organization that provides a variety of services to other large institutions, such as cash management, securities lending, and risk management. The number of assets required to trade with Prime Broker can range from $500,000 to $50 million. (According to The Ascent)
Verdict
Prime Broker has been setting the stage for the next phase of digital asset development. In particular, investment based on speculation is gradually shifted to asset management in investment with supporting forms such as conducting large-scale investment transactions, capital management, asset lending, expansion relationships, and providing specialized services such as short selling, access to research information, and updates on legal matters.
Due to the size and maturity of the market, no official Prime Broker is offering digital assets yet. As a result, many companies from traditional markets, including leading Prime Broker service providers, are anticipated to enter the digital asset industry in the future.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.
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