Crypto repos could hit the market in 2018

Traders attitude towards cryptos BI Intelligence

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Alex Grebnev, a former Wall Street investment banker, is launching a platform, called Oxygen, that will allow cryptocurrency holders to strike repurchase (repo) agreements with each other. Oxygen will collaborate with cryptocurrency exchange Changelly, targeting its 1.6 million private and institutional users.

In a repo agreement, a party (typically a bank) sells an asset it owns, like US Treasury bonds, to investors in return for funds (essentially a short-term loan), with the asset acting as collateral. The party later buys back the asset, regaining the original asset and interest on it. Oxygen is expected to launch in 2018.

The introduction of repo agreements could impact the cryptocurrency market in a couple of ways:

Boosting liquidity in the market. Currently, many cryptocurrency owners struggle to liquidate their holdings, as transaction prices on the assets have climbed, making them hard for holders to sell, and unattractive for investors to buy. Oxygen hopes to remedy this by allowing crypto holders to lend out one asset like Bitcoin, and take on another like Ether as collateral. This way, a holder lending out their Bitcoin can trade Ether for the duration of the agreement, as well as get their Bitcoin back at its conclusion. This will allow people holding cryptocurrencies to make income on them without having to sell.
Attract sophisticated investors to cryptos. Oxygen also wants to enable cryptocurrency shorting. For instance, the person in the example above who borrows Bitcoin may sell it hoping the price will subsequently fall, so they can repurchase the asset when it's time to return it and profit from the difference. Shorting is a widespread tactic among hedge funds and FX traders, so enabling it within the cryptocurrency space could draw more mainstream investors to the asset class, as this would allow them to transact with the asset in a way they're familiar with and adept at.

Although promising in theory, the circumstances of cryptocurrency markets will make these instruments highly risky. In conventional repo agreements, the collateral in question is usually a less risky asset, most commonly government bonds and securities, whose price changes relatively little and in familiar ways. By contrast, virtually all cryptocurrencies are characterized by dramatic price fluctuations, making it very hard even for sophisticated investors — which most cryptocurrency owners aren’t — to make a reasonable guess about what the price of these tokens will do. As such, this vehicle could result in heavy losses, especially for the uninitiated.

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