As always, caveat emptor, and investors should understand all risks involved in CBDCs and crypto derivatives in 2024 before cyber-speculating…

Last year, over 100 countries were exploring the potential of Central Bank Digital Currencies (CBDCs) and a potential spot Bitcoin ETF on the horizon. 

Against this backdrop of crypto development, there will be a wider variety of investors entering the market, each carrying different levels of risk appetites. 

However, not all investors are keen on the idea that digital assets such as Bitcoin tend to have heightened volatility in comparison to traditional assets. So, are crypto-structured products a better approach for 2024? Following are some insights.

What are crypto-structured products?

 According to Jeff Zhao, Co-founder, darwinbit, the crypto structured product market makes up less than 1% of the overall crypto market, with a combined US$2.4bn in total value locked across protocols. 

“Although relatively still in its infancy in the crypto market, structured products are rapidly gaining traction over direct investment from both business-to-business and business-to-consumer stakeholders as investors look for methods to soften the impacts of market downturns without sacrificing potential gains. Of course, structured products are nothing new, as they have been a practical tool for traditional retail finance players that need a customized assortment of assets. Crypto structured products are simply financial instruments designed to stretch potential returns and reduce crypto volatility risks — which is especially important during turbulent periods — simultaneously,” Zhao said. 

Jeff Zhao, Co-founder, darwinbit

Also, crypto structured products’ malleable nature may appeal to investors seeking more control. More precisely, they allow investors to create their strategy and meet their own specific investment goals.

Do they cushion crypto volatility? 

 In principle, with the power of leverage, investors expect to harness these large price swings in the notoriously volatile cryptocurrency market to earn significant returns. 

Zhao continued: “Crypto-structure products can be utilized to generate additional returns for investors on top of holding an asset for its price fluctuations. This is why, as major cryptocurrencies such as Bitcoin can shoot up to around US$42,000 and Ethereum crosses US$2,200, we are seeing an increased interest in structured products that help investors capture extra yields from the short-term volatility spikes. Likewise, this concept can be applied when the market turns red, and can help investors generate an above-average return.”

Crypto structured products can equip investors to maximize their investment returns when they are right, and minimize losses if the investment goes awry. Their high leverage is a tool that opens the doors to the unlimited upside potential while the “no liquidation guarantee” gives the end users the wiggle room to better manage their investments, according to Zhao.

In 2024, investors confronted with the complexity of navigating the dynamic and rapidly changing crypto market may opt to concentrate their investment positions among assets they are familiar with. However, this approach often leads to the oversight of the advantages of diversification, resulting in the formation of inefficient portfolios that do not fully capitalize on risk-adjusted returns.

Introducing diversification across various assets with structured crypto products can effectively mitigate portfolio volatility, offering a more comprehensive exposure to the evolving trends and growth potential within the industry.

Two sides to the structured crypto coin

 Newcomers to crypto investments often feel as if understanding digital assets is equivalent to moving mountains. 

This is where both seasoned investors and the less experienced entrants will find an appeal in crypto structured products, as they feature user-friendly interfaces and customizable options for investors with different risk appetites. 

According to Zhao: “Such products facilitate seamless interaction between the end users and the products, thereby lowering the barriers for retail investors and expanding the user base of partner exchanges. In this context, crypto structured products (can) meet the needs of an extensive range of investors.”

Nevertheless, Zhao’s firm lists the following risks of crypto-structured products:

  • Volatility risk
    Cryptocurrency prices are notoriously volatile. This volatility can result in substantial losses if the market moves against the investor’s expectations. For instance, a sharp drop in the cryptocurrency’s price, due to black swan events such as the LUNA crash (as explained by Forbes), can lead to heavy losses for investors holding structured products tied to that cryptocurrency.
  • Market risk
    Many factors can adversely affect the overall crypto market, including economic conditions, geopolitical events, and changes in investor sentiment. As well, increasingly common major security breaches, such as one at a cryptocurrency exchange (e.g. the Mt Gox cyber incident), could trigger a market-wide sell-off. Ultimately, this would negatively impact crypto structured products and could potentially lead to losses.
  • Regulatory and legal risks
    As cryptocurrencies become more mainstream, they attract increased scrutiny from regulators globally. New laws or regulations, such as the Regulation on Markets in Crypto-Assets (MiCA) in Europe, could have far-reaching impacts on the value and viability of certain crypto structured products. Furthermore, the lack of a clear regulatory framework in some jurisdictions can lead to legal uncertainties and potential disputes.
  • Complexity risk
    As much as crypto structured products are tailored to various investor needs, they still come with a layer of complexity that can be difficult to understand, especially for new investors. This complexity risk arises from the intricate combinations of derivatives and payout formulae. Investors may struggle to fully understand the product’s structure, the underlying assets, and the associated risks, leading to potential misjudgments and unexpected losses. Hence, it is critical that investors have a solid understanding of each product’s terms and conditions, underlying calculations and the fine print on its mechanics.
  • Counterparty risk
    Since structured products are typically unsecured debt, investors face the risk of the issuer defaulting. If the issuer becomes insolvent, investors will be considered unsecured creditors and will have no preferential claims to any assets held by the issuer. Furthermore, there may be no liquidity guarantee, adding another layer of risk to the investment.

All these risks, according to Zhao, can individually or collectively exert significant pressure on an investor’s portfolio. Understanding every single risk variable is crucial for making informed decisions and managing potential losses in the world of crypto structured products.