Use Structured Notes to Reduce Crypto Risk

Cryptocurrencies often make headlines for their price fluctuations. For example, Bitcoin has fallen more than 70% from its all-time high in November 2021. To manage this volatility, investors are increasingly turning to derivatives, financial products tied to other assets.

Derivatives trading can be a complex business best left to professional investors. But structured notes offer less experienced investors a perfectly packaged way to profit from the volatility of crypto.

Benzinga examines structured notes and how they can reduce crypto risk.

What is a structured note?

A structured note is a hybrid security that combines elements of debt and derivatives into a single financial product. Structured notes attempt to provide a guaranteed return without jeopardizing the capital initially invested. These investment vehicles are generally highly customizable, meeting the needs of investors.

In crypto, structured notes are prepackaged baskets of crypto derivatives. Crypto derivatives are financial instruments linked to the performance of digital assets (like ETH, BTC, USDT). Usually a bond component provides payments and protects the initial investment. Meanwhile, the derivative component determines the additional profits.

Although structured notes have been around for decades in traditional finance, they are a relatively new addition to crypto markets. As interest in the crypto markets grew, investors rushed to add cryptocurrencies to their portfolios. Over time, adding alternative products like derivatives has become more attractive.

The Chicago Mercantile Exchange (CME) was the first to offer crypto derivatives. In 2017, the CME began settling Bitcoin and Ethereum futures contracts as well as USD. Since then, many other derivative products have entered the market. But it wasn’t until 2021 that structured crypto products were launched. Investors can choose from several structured crypto products to seek returns even in volatile markets.

How do structured notes work?

Structured Notes are customizable investment packages that consist of two elements:

  • A derived component
  • A bond component

The derivative side “deducts” its value from another asset – in this case, cryptocurrencies. The yield of the derivative is based on the performance of the crypto market. The bond component protects the initial investment by returning the principal payment.

Structured products offer the opportunity to seek higher returns alongside capital protection. As such, they have traditionally been popular with wealth management clients. For retail investors, structured notes provide access to investments that might otherwise be out of reach. They can be adapted to meet unique needs while distilling complex crafts into one streamlined exhibit.

The returns of a note or a structured product depend on a set of predetermined rules. For example, a structured note could pay a specific percentage return as long as the linked asset achieves a predefined performance.

Crypto structured products have many parallels with their traditional financial counterparts. However, they are not issued by financial institutions like banks. Crypto structured notes can be of different types with different redemption structures.

How Structured Notes Help Reduce Crypto Risk

Crypto structured notes allow investors to seek competitive profits while protecting their capital. Most crypto-structured notes have built-in mechanisms to take advantage of price fluctuations. As a result, investors can generally keep their original capital safely and still earn a return regardless of market ups and downs.

While potential profits vary, crypto-structured notes allow investors to hedge their risk. Without buying crypto directly, investors can see returns even in volatile crypto markets. While crypto investors could lose it all at any time, structured notes are designed to provide lower risk returns. Potential returns may be lower than direct crypto investments.

Benefits of Structured Notes

Structured notes offer enhanced returns while providing principal protection. Here are some benefits of structured notes:

  • Main Protection: Cryptostructured notes help you protect your principal regardless of market movements.
  • Highly customizable: Structured notes can be designed to meet your investment objectives and risk appetite.
  • Tax efficiency: Structured notes may offer tax advantages depending on your country and tax regime.
  • Volatility risk management: You can better manage the notorious risk of crypto price volatility.
  • Independent of market sentiment: You have the opportunity to make a profit whether the market sentiment is bullish or bearish.
  • Indirect exposure to cryptocurrencies: Take advantage of returns related to crypto investment without buying and storing crypto.
  • Better regulate: Structured notes may be more regulated than the general cryptocurrency industry.
  • Loss limitation mechanisms: Cryptostructured notes are designed to automatically limit potential losses.

Disadvantages of Structured Notes

Considering the advantages of structured notes as an investment vehicle, it is easy to believe that they are not without drawbacks. Any investment involves risk, and you should be aware of the following:

  • Complexity: Newbie investors may find it difficult to understand how structured notes work and how potential rewards are calculated.
  • Maximum earnings cap: You could lose potential profit depending on the price of the underlying asset.
  • Higher fees: Structured notes cost more to launch and build than other financial products. Therefore, you may pay higher in-app charges.

Manage Crypto Volatility with Crypto Structured Notes

Crypto structured products combine interest-bearing assets and derivatives. They provide easier access to typically complex products by simplifying them into a single investment. The result is a customizable investment with a better risk profile and capital protection. Remember that volatility is both the bane and the boon of crypto investing. While downside management can be a nightmare, crypto structured notes can help.


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