Another wall street giant, another crypto product, sizable size of interested clients and an opportunity to invest early. This has been the story we are probably hearing third time this week of a Wall Street Institutional Giant introducing a crypto product. First, it was Citi, then Morgan Stanley and now Bank of America. In a recent announcement, Bank of America and Merrill Lynch is set to produce a Bitcoin product that will be tradeable for clients and based on the futures markets in aggregate.
BoA may introduce a Bitcoin Derivative connected Non-Deliverable Forward (NDF)
If sources are to be believed, Bank of America and Merrill Lynch has joined the beeline to offer crypto-based products to its clients. The Wall Street bank is set to produce a Bitcoin product that will be tradeable for clients and based on the futures markets in aggregate. As Goldman Sachs, Citi and Morgan Stanley rush into the market, Bank of America doesn’t want to be left behind and loose on important clients and future market share.
The product that Bank of America is looking to develop seems to be a Bitcoin derivative connected to a Non-Deliverable Forward. A complex product only the best on the Street can understand. An NDF, according to Investopedia, Non-deliverable forwards (NDF) are a cash-settled and usually short-term forward contract. The notional amount is never exchanged, hence the name “non-deliverable.” Two parties agree to take opposite sides of a transaction for a set amount of money (in the case of a currency NDF) at a contracted rate. The profit or loss is calculated on the notional amount of the agreement by taking the difference between the agreed upon rate and the spot rate at the time of settlement.
While NDF gives exposure to the underlying asset, it also opens doors to a variety of arbitrage, speculative and hedging opportunities. This provides us with an insight that may be Bank of America’s clients are looking to get exposed to cryptos but do not wish to do it directly. Or is the unclear regulatory environment forcing Bank of Amercia to introduce a NDF?
Too many crypto derivative products: Excitement with caution
Earlier this week, Citi, the New York-based bank had announced that it has come up with perhaps the most direct way to invest in cryptocurrencies without actually owning them. The bank has developed an instrument it’s calling a Digital Asset Receipt or DAR. It works much like an American Depository Receipt or ADR, which has been around for decades to give US investors a way to own foreign stocks that don’t otherwise trade on US exchanges.
Around 48 hours back Morgan Stanley too announced that it will be introducing Bitcoin Swaps which would investors synthetic exposure to the performance of Bitcoin, and the investors will be able to go long or short using the so-called price return swaps
While the world was readying itself for a Bitcoin ETF what we have here now is 3 highly complex derivative products. A Digital Asset Receipt of Citigroup, a Price Return Swaps of Morgan Stanley and Now a Non-Deliverable Forward of Bank of America and Merrill Lynch. This may make investing easier for institutions and give them exposure to cryptos, these products are derivatives and highly speculative. The 2008 financial crises were driven by such complex products that not only exposed the market to unnecessary leverage but also created a bubble that eventually went bust melting down the global economy.
The nascency at which cryptocurrencies are, real investment into them is beneficial, but as more and more speculative products start entering the industry, one can expect crypto prices to fluctuate and be more volatile. While the excitement of institution money entering markets is good, one has to remain cautious of the way it is entering and what consequences it can have.
Like Warren Buffet puts it “Derivatives are weapons of Mass Destruction”, hope their introduction to cryptos this early doesn’t damage the crypto industry.
Is the introduction of such a complex derivative financial product for cryptocurrency good or bad? Do let us know your views on the same.
Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Follow him on Twitter at @KoinKing1 or connect with me on linkedin.