Lack of Portfolio Margining Limits Derivatives Traders in Crypto

A lack of portfolio margin solutions in cryptocurrency is hurting traders ability to offset risk.  Portfolio margin allows traders to borrow money against a portfolio of collateral in order to facilitate more efficient trades, similar to how a prime brokerage functions […]

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key takeaways

  • Without portfolio margin solutions, it is difficult for crypto traders to offset risk
  • Options exchange platform Deribit offers portfolio margin services, but not to U.S. residents

A lack of portfolio margin solutions in cryptocurrency is hurting traders ability to offset risk. 

Portfolio margin allows traders to borrow money against a portfolio of collateral in order to facilitate more efficient trades, similar to how a prime brokerage functions for hedge funds in public markets.  

As a retail investor, each position has margin requirements that are separately calculated.  As an institution, leveraging your entire portfolio as collateral should lower the margin you need to post to fund the trade.

“There’s a big thirst for this service,” said Christopher Hehmeyer, CEO of Hehmeyer. “There are a bunch of people that are trying to be service providers in the crypto space.” 

Portfolio margin means traders do not have to put up the entirety of the sold option, allowing them to run portfolios with greater efficiency. 

“Portfolio margin at its core allows you to sell options with good collateral usage, basically, so you don’t have to put the full notional down for every option you sell,” said Joshua Green, managing partner at Orthogonal Trading in a recent podcast. “So, without that, it’s very, very inefficient to run any sort of portfolio that has any sort of short options in it.”

Portfolio margin provides traders with more buying power and leverage.  With that leverage, institutions can hedge out potential risks and lower the overall volatility of their portfolio.  This would theoretically become a self-reinforcing cycle allowing more liquidity to enter the space.   

“If I buy spot bitcoin, say $3 million worth, and sell the futures, posting $1 million, if a prime brokerage can lend me the money to finance that, then I could trade a lot more on these basis trades,” said Hehmeyer. “If a futures commission merchant will send $1 million to the Intercontinental Exchange and send $1 million to the Chicago Mercantile Exchange, and have a banking relationship that will provide that capital to a trading company, then the trading company doesn’t have to put up $2 million.” 

Deribit, a Panama-based crypto options exchange, recently became the first platform to offer portfolio margin services for clients with hedged positions. Investors must maintain a minimum net equity of 0.25 Bitcoin or 7.5 Ethereum to qualify. Deribit does not allow United States residents to trade on its platform. 

The lack of portfolio margin solutions highlights a historical paradox in the crypto space, where innovation tends to come from offshore, less regulated venues. Until blue chip platforms adopt these services, investors looking to utilize portfolio margin must use newer, questionable exchanges.

For U.S. based investors, that has often meant choosing between better prices and liquidity from offshore exchanges and the security of a regulated venue like CME.

“When people provide that financing service, or prime brokerage service, it’s going to make the market more mature, more efficient, and increase volume,” said Hehmeyer. 

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