In the fast-paced, 24/7 world of cryptocurrency trading, the collapse of FTX in 2023 served as a stark reminder of the inherent risks that come with the territory. As the dust settles and the industry works to rebuild trust, leading crypto trading firms are sounding the alarm on the critical importance of round-the-clock risk management.
The Ever-Present Specter of Risk
At the recent “Views From Wall Street to Crypto” event held at Consensus Hong Kong, Gaurav Sharma, CEO and CIO of Brevan Howard, emphasized the need for vigilant risk management across multiple fronts:
“You have traditional players who have come into the space now, especially for us, most of our trading happens of exchange settlement, where you actually keep your assets on custodians while you are able to trade on exchanges. So the technology has come far ahead in terms of the last 18 months since then, [but] there’s more work to do.”
– Gaurav Sharma, Brevan Howard
Sharma stressed the importance of managing market risk, counterparty risk, and credit risk on a 24/7 basis – a challenge unique to the crypto space. Without the traditional safety nets of banks and clearing houses, the onus falls squarely on individual firms to mitigate these risks.
Counterparty Risk Takes Center Stage
For directional and arbitrage traders alike, counterparty risk has emerged as a top concern. Fabio Frontini, founder of Abraxas Capital Management, didn’t mince words:
“When we do arbitrage, the counterparty risk is the most important one. Credit risk is also very important.”
– Fabio Frontini, Abraxas Capital Management
Frontini also highlighted the importance of stress testing, noting the unique risks posed by perpetual futures in crypto markets. Unlike traditional markets, traders can be stopped out and lose their margin entirely – making rigorous scenario analysis all the more critical.
The Quest for Better Liquidity
Mike Kuehnel, CEO of market-making firm Flow Traders, pointed to liquidity fragmentation as an ongoing challenge. With assets spread across multiple blockchains, DeFi protocols, and centralized exchanges, ensuring seamless execution remains a hurdle:
“Getting the best price and giving you the possibility to transact whenever you want to is a key ingredient.”
– Mike Kuehnel, Flow Traders
While the FTX debacle certainly dealt a blow to overall market liquidity, Kuehnel emphasized the need for greater transparency and data availability to restore investor confidence and improve order book depth.
The Road Ahead
As the crypto industry matures, the imperative for robust risk management will only grow stronger. Firms that can navigate the unique challenges of 24/7 markets – from managing counterparty and credit risks to ensuring optimal liquidity – will be best positioned to thrive.
But it won’t be easy. As Sharma noted, while the technology has come a long way since the dark days of 2023, there’s still much work to be done. For an industry built on the promise of decentralization and disintermediation, the path forward will require a delicate balance of innovation and risk mitigation.
One thing is certain: in the high-stakes world of crypto trading, those who fail to plan for every contingency do so at their own peril. As the old adage goes, “risk never sleeps” – and neither, it seems, do the markets.
