There's a lot of talk about crypto prime brokers.

But, full-service prime brokerage does NOT exist in crypto.

A one-stop shop for spot and derivatives execution, lending, reporting, clearing, and custody not only hasn’t been built, but it’s not necessary (yet).

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In traditional financial markets, prime brokerage is a $30 billion dollar business.

Morgan Stanley referred to its prime brokerage business as the “centre of the machine” of its equity trading division, and their CFO declared that “Prime brokerage is our biggest business.”

In the market for crypto assets, prime brokerage is just heating up.

Today, @coinbase acquired @tagomisystems AND @BitGo launched BitGo Prime.

Last week, @GenesisTrading purchased @Crypto_Vo1T in a bid to become a prime brokerage.

And two weeks ago, @falconxnetwork raised $17M

So, what is prime brokerage?

A prime broker provides execution, lending, financing, reporting, cap intro, clearing and custody services.

They’re basically a concierge to an investment firm, making their life easier by offering investment services through one easy platform.

Let's look at the current state of crypto prime brokerage.

Tagomi launched in 2018 and enabled investors to seamlessly execute trades at the best possible price across dozens of different exchanges.

Prior to Tagomi, institutional traders had to rely on OTC desks.

Tagomi’s splashy entrance made something click in the market. Suddenly, EVERYONE, especially custodians, wanted to be a prime broker.

From @Anchorage to @CopperHQ to @BitGo to @coinbase... nearly every custodian is now offering trading.

However, prime brokerage in its traditional sense still does not exist.

Aside from the ability to choose principal or agency brokers, there are three more aspects of prime brokerage that are missing.

1) Derivatives trading
2) Lending
3) Capital introduction

Derivatives:

In 2019, 746 market participants responded to a prime brokerage survey run by @AiteGroup. The #1 thing that investors said they look for in a prime broker: derivatives.

Crypto derivatives are alive and well.

However, the PBs in the space only offer spot trading.

Lending:

The extension of credit to trade is a primary offering for prime brokerages in the traditional financial space.

For this, a prime brokerage with a large balance sheet is a must. This is one the reasons why the Coinbase acquisition of Tagomi makes so much sense.

Coinbase holds over $8B in Bitcoin and other crypto.

Using this capital, Tagomi can now let customers borrow cash, borrow crypto, and short crypto.

Capital Introduction:

The premise of cap intro works like this…

You’re a custodian.

You custody the assets of a crypto hedge fund.

Because the hedge fund custodies their assets with you, you now grant them access to asset allocators that you know.

Your goal is to get those allocators to give their capital to the hedge fund.

Why?

Because when the hedge fund takes on new capital, they then invest that into cryptocurrencies.

And because you custody their crypto, you make more money.

Everybody wins.

PB is one of the most interesting crypto areas to watch.

As @2Ragu said, “Similar to traditional finance, there will be 4-5 prime-brokers that dominate the space. We saw a similar pattern with crypto exchanges, where 200+ launched, but only 4-5 grew into multi-billion firms.”

As more institutions invest in Bitcoin, they’ll demand better platforms.

As the need for better platforms intensifies, venture will continue to flood the market.

The venture backed providers will quickly realize that it makes sense to join forces and the M&A space will stay hot

This will be an exciting race as custodians and execution platforms layer on derivatives, lending, and cap intro in a race to build the first full-service PB platform.

Link below to read more about @BlockWorksGroup thoughts on prime brokerage. https://blockworksgroup.io/blog/the-battle-to-build-cryptos-first-prime-brokerage