Structured crypto deposits: The workings of a new investment product that protects against risks of market drops

Structured investment products, or SIPs, have become commonplace in the financial sector. These tools are excellent for investors with specific needs and can yield acceptable returns. A similar trend is now appearing in the cryptocurrency space, making digital assets a lot more attractive. 

The purpose of structured investment products

Financial services and products need to keep evolving and changing to accommodate individual users and investors' needs. As demand for exposure to different and varied financial vehicles becomes more outspoken, financial institutions shift their attention to Structured Investment Products or SIPs. Rather than providing a single investment, these types can meet investor needs through a customizable product mix. 

It is not uncommon to see derivatives in the SIP basket. Unlike other investment opportunities, a derivative can provide exposure to different types of sectors. It is a viable solution for hedge funds, organizations, or even retail clients. 

The scope and complexity of a structured investment product can vary from one user to the next. It all comes down to one's risk appetite. Any investment can incur financial losses if mishandled or a sudden market shift occurs. Depending on one's risk appetite, it may be better to have a complex or straightforward structured investment product. Options to explore include fixed income markets and derivatives, both of which are common concepts in the SIP segment.

What makes a SIP intriguing is how it doesn't provide traditional payment features. There are no periodic coupons or final principal. Instead, invests opt for non-traditional payoffs derived directly from the performance of the SIP's underlying asset(s). The upside is that, even if the underpinning asset decrease in value, investors will still get their initial deposit back afterward. 

A few examples

Although most people are aware of this vehicle, there is an option to gain exposure to certain stock indices. An investment vehicle tracking the S&P 500 Stock Index's performance can serve as a base for a Structured Investment Product. As the S&P 500 goes up, the structured product will increase in value. If it goes down in value by the time the product matures, the investor will step get their initial deposit back. 

The structured product will often be based on a CD or bond with a call option under the hood. A very appealing investment option is created as the initial capital is protected while providing upside profit potential. As is often the case, such a service comes at a price, and there will be fees to contend with. In some cases, those fees may negate one's entire profit, which can be rather problematic. 

Benefits and drawbacks

Similar to other investment options on the market today, a SIP has both benefits and drawbacks. 

The main benefits include a better way to diversify one's portfolio, principal protection, relatively low volatility, and a chance at achieving more significant returns. How many of these benefits will apply depends on the way the SIP is structured. 

On the other hand, a SIP is more complex than investing in assets directly, triggering some additional risks. While banks try to offer SIPs to as many people as possible, they sometimes lack transparency regarding the fees that may apply. Additionally, not every provider will let investors exit their SIP before it matures. 

Despite these drawbacks, the concept of Structured Investment Products is now gaining ground among cryptocurrency enthusiasts. A somewhat surprising development, although diversification is equally crucial in that segment. 

Why SIPs can benefit crypto enthusiasts

Unlike the traditional Structured Investment Product, a cryptocurrency-oriented SIP will not be issued by a bank or other centralized provider. The decentralized finance industry has given birth to many different investment vehicles that require no intermediaries or approval to access. Structured Investment Products are a logical addition to this growing collection of tools and services to catalyze global crypto adoption.

By creating products that replicate crypto-assets or an index of different crypto-assets, mainstream investors can gain broader exposure to this industry. Additionally, all custodial and trading aspects are left to these products' issuer, creating a nearly automated investment solution. 

The first company that offered such a service was Gekkoin. Their structured crypto deposits offer up to 100% guarantee of profit or one's money back if the Bitcoin price were to drift lower. Investors can expect a return from 4% per annum through these structured deposits, making it more appealing than keeping money in a savings account.

As the cryptocurrency industry continues to grow, new investors need to be attracted. By providing an option such as structured deposits with capital protection, more investors can make their way to this industry without risking their funds. Vehicles like these negate crypto-assets' negative volatility yet still provide a return on investment if the volatility results in a bull market.

Closing thoughts

When popular vehicles from traditional finance make their way to the cryptocurrency industry, exciting things are bound to happen. Structured Investment Products can appeal to many types of investors, regardless of their net worth. More importantly, it provides a way for investors to diversify their portfolios with less traditional financial vehicles and without any additional risk. 

For now, it remains unclear how popular these crypto-oriented SIPs will turn out to be. It is a welcome addition to the evolving industry, especially due to the institutional appeal these products can have. Bringing crypto-assets to a much broader and varied audience is essential if this industry is to enter mainstream adoption levels. 

The views and opinions expressed in this article are based on the authors' personal opinion and experience, and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this article do not constitute investment advice.

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