Kaiko explains how to manage risk in crypto

Rick Steves

Kaiko, a provider of real-time and historical cryptocurrency trade data, order books, and aggregated prices through a cryptocurrency API, has published an explainer on how to do proper risk management in crypto assets.

The deep dive into crypto risk management was released by Kaiko in the aftermath of the FTX collapse, “perhaps the single biggest risk management failure in the history of finance”, as they put it.

The crash course in basic risk and liquidity metrics should be required reading for anyone managing crypto investments, the firm stated.

“When bear market hits, tide goes out and we see who was swimming naked”

The course covers Risk Metrics such as Value at Risk (VaR), Expected Shortfall (ES), and Implied Volatility. Part 2 covers Liquidity Metrics such as Market Depth, DeFi Liquidity Data, and Exchange Due Diligence.

“When liquidity is plentiful, risk management is less of a concern as most companies’ balance sheets look healthy and liquid. However, when a bear market hits, the tide goes out and we see who was swimming naked. Those with significant positions in illiquid tokens, such as FTT or stETH, have paid the price for not monitoring the liquidity of those positions and not accurately assessing the outsized risk of their positions should prices go down”, Kaiko’s research team stated.

Risk management and crypto are two words that up until lately have rarely been mentioned in the same sentence. To quote the new CEO of FTX, John Ray III, he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

“If businesses investing in crypto are to survive going forward, risk management must play a central role in the investment process. Liquidity metrics, combined with traditional risk metrics such as VaR or Expected Shortfall will allow investors to survive bear markets like these and reap the rewards of survival come the next bull market”, it concluded.

Kaiko raised $53 million in June

We were already in crypto winter by the time Kaiko raised $53 million in a Series B funding round aimed at further consolidating its position as a global industry reference for centralized and decentralized digital assets data services.

The round, which will fuel the enhancement of Kaiko’s institutional data products and infrastructure, was led by Eight Roads, with participation from Revaia and existing investors Alven, Point9, Anthemis, and Underscore.

The proceeds of the funding will also be used to expand Kaiko’s global presence. The firm currently operates out of four global offices located in Paris, London, New York, and Singapore.

The market data provider was founded in 2014 and quickly established its position by enhancing transparency and operational efficiency for institutional companies, DeFi participants, and Web3 enterprises. The firm offers a product suite comprised of market data, portfolio solutions, rates & indices, pricing services, DeFi data, and research.

Kaiko’s leading position can be proven by its top tier client roster which includes ICE Global Network, Deutsche BörseOanda, Bloomberg, and other large institutions in North America and Europe. The firm provides data feeds for Ledger, Paxos, Chainlink, Tezos, Messari, SupraOracles, Flux, and the Pyth network, among others.

Kaiko has recently acquired Kesitys, a provider of quantitative decision tools for risk optimization, and agreed to acquire CoinShares’ Napoleon Index subsidiary, enabling the launch of Kaiko Indices.

In February 2022, the firm received their SOC-2 Type-1 accreditation, a gold standard certification developed by the American Institute of CPAs (AICPA) that indicates how companies manage data security, confidentiality, and availability of measurements and controls.

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