In the fast-paced world of cryptocurrencies, managing investments can be complex and time-consuming. However, structured products offer a solution by simplifying the investment process for individuals and providing them with opportunities to mitigate volatility and manage risks.
To delve deeper into this topic, Crowdfund Insider had the privilege of interviewing Tommy Johnson, the co-founder of PsyFi, a firm specializing in structured products for crypto markets.
Our conversation with Tommy Johnson is shared below.
Crowdfund Insider: What are structured products, and how do they differ from traditional investment vehicles?
Tommy Johnson: “Structured products” is a general term that refers to a basket of assets bundled into a single product. These assets can be bonds, stocks, derivatives, and more.
Portfolio managers often combine different assets to create risk-reward structures that meet the needs of a specific client. Some structured products may be relatively straightforward and easy to understand, while others can involve more intricate strategies and may be suitable for more sophisticated investors.
Managing and creating these baskets of assets typically requires extensive quantitative knowledge and time. However, structured products aim to simplify the investment process for end clients by abstracting away these complexities. They enable individuals to deposit, withdraw, buy, or sell products with relative ease, similar to how they would interact with a simple stock.
Furthermore, structured products often offer additional features that traditional investment vehicles may not have. For example, they can include capital protection mechanisms, such as partial or full principal guarantees, which mitigate downside risk. They can also incorporate leverage, allowing investors to amplify their exposure to underlying assets or markets.
Additionally, structured products are often issued for a fixed term or have specific maturity dates, after which they may be redeemed or settled. This feature provides investors with a predefined investment horizon, which can be attractive for those seeking more certainty in their investment outcomes.
Crowdfund Insider: What are the main advantages of structured products in the context of the crypto market?
Tommy Johnson: In the context of the crypto market, structured products offer several significant advantages.
Cryptocurrencies are known for their nascent nature and high volatility. As a result, structured products can be designed to create payoffs based on this volatility. They provide users with opportunities to lock in profits, generate yields, or hedge their directional exposure.
The rapid pace at which the crypto market moves makes it challenging to manually maintain a target structure in a portfolio. Structured products help address this issue by automating and streamlining the management process, saving investors valuable time and effort.
Structured products in the crypto market also offer increased accessibility and diversification. They provide investors with exposure to the crypto market without the need to directly own and manage cryptocurrencies themselves. This is particularly beneficial for investors who may be hesitant to navigate the complexities of crypto exchanges or hold digital assets directly.
Furthermore, structured products can be tailored to suit different risk appetites and investment objectives. They allow for the creation of customized products with specific risk-reward profiles, enabling investors to align their investments with their individual preferences. Whether an investor seeks capital preservation, income generation, or aggressive growth, structured products can be designed to meet these varying needs.
Crowdfund Insider: How can structured products help mitigate the volatility and risks associated with cryptocurrencies?
Tommy Johnson: Through the use of derivatives and other risk management techniques, structured products can help investors protect their portfolios against adverse market movements. Instead of manually selecting and rebalancing individual cryptocurrencies, structured products can be created to provide users with diversified exposure to multiple coins.
This eliminates the need for investors to constantly monitor and adjust their portfolios, reducing the risk of concentration in a single cryptocurrency and offering a more balanced risk profile. By incorporating elements such as stop-loss mechanisms or downside protection, these products offer a level of downside risk control that can be attractive to risk-conscious investors.
Additionally, structured products often come with enhanced transparency and regulatory oversight. This can provide investors with a greater sense of security and confidence when engaging in the crypto market. Regulated structured products adhere to specific standards and guidelines, which helps mitigate some of the concerns associated with the unregulated nature of the crypto space.
Crowdfund Insider: What do you see as the future potential and growth prospects for structured products in the crypto industry?
Tommy Johnson: Looking ahead, structured products hold significant future potential and growth prospects in the crypto industry. For instance, in the current high-interest-rate environment, there has been increased interest and development of principal-protected notes. This innovative structure allows investors to place their assets in a theoretically risk-free fixed-income structure, such as US Treasuries, and utilize the yield generated to purchase derivatives of more risky products. This approach provides exposure to riskier assets without jeopardizing the principal investment.
However, it should be noted that the development of such structures on the blockchain is still in its early stages, with much-untapped potential in DeFi. It takes a lot to build these structures on-chain, so we’re barely scratching the surface with what’s available in DeFi. Once there’s a suite of structures that can cater to most market conditions, there could be tremendous growth.
So as the capabilities of DeFi platforms expand and a broader suite of structured products becomes available to cater to diverse market conditions, the growth opportunities for structured products in the crypto industry are immense.
Crowdfund Insider: How do structured products contribute to the overall development and maturation of the crypto ecosystem?
Tommy Johnson: Structured products also contribute to the overall development and maturation of the crypto ecosystem by offering companies and individuals a means to hedge their exposure to volatility and directional price movements.
For example, consider a company that relies heavily on Solana transactions for its core business operations. Fluctuations in the price of Solana (SOL) can impact the company’s operating costs. By utilizing structured products and derivatives related to SOL, the company can hedge the risk associated with price volatility, similar to traditional finance practices seen in industries such as airlines or commodities like oil. The availability of hedging options and risk management tools provided by structured products helps create stability in the crypto markets as they continue to mature and attract more participants.