Australia-based digital asset company Zerocap is well-positioned to monitor developments in the structured products sector, having engaged in OTC trading, market making, derivatives, and crypto custody since its inception in 2018.
In this discussion, Zerocap’s head of sales, Mark Hiriart, shares insights on the evolution of these products, details about a new semi-principal protected offering their firm is releasing, variations in demand for structured products by region, and the most unique structured product request he has encountered.
Can you provide an overview of Zerocap?
Zerocap is Australia’s top institutional digital asset firm, launched in 2018. Our operations include an OTC trading desk, market making, and derivatives, all supported by our custody services. We function as a Corporate Authorised Representative of an Australian Financial Services License (AFSL) holder, allowing us to trade financial products, including derivatives, with both wholesale and accredited investors. Additionally, we have formed several notable partnerships, such as with ANZ Bank for their stablecoin and the Reserve Bank of Australia (RBA) for various proof of concept initiatives and pilots. Over the past 18 months, we have emerged as the leading liquidity provider in Australia, serving clients across more than 50 countries.
You recently introduced a new product — can you elaborate on it?
We have teamed up with CoinDesk Indices to unveil a semi-principal-protected structure linked to the CoinDesk 20 Index (CD20). This product offers upside potential via the CD20 while providing principal protection that limits downside risk to 5%. Investors can potentially see returns of up to 40% on the upside. This marks the first of several structured products we plan to develop with CoinDesk Indices, featuring various payoffs for different risk preferences.
The timing is especially pertinent given the current market outlook. With recent rallies in digital assets surrounding Trump and anticipated global trade challenges, we foresee some lateral movement in the near future. This moderate-risk product is tailored to suit the present macroeconomic conditions.
What market need does your new product address, and who is its intended audience?
In the digital asset realm, we lack the established benchmarks found in traditional finance. For instance, if an investor in Australia or Hong Kong desires exposure to U.S. tech stocks, they typically seek products linked to the NASDAQ or QQQ ETF. However, in crypto, we haven’t achieved that level of indexing yet. This product is aimed at three demographics: family offices and high-net-worth individuals looking to enter the crypto space; investors seeking broad-based crypto exposure without the need to analyze individual assets; and those familiar with Bitcoin who want diversified exposure with a focus on managed risk.
Why did you decide to base it on the CoinDesk 20 Index?
We chose the CoinDesk 20 Index for several pivotal reasons. Firstly, we hold a high regard for the CoinDesk brand and the caliber of their indexing team. Secondly, our robust relationship with Bullish grants us access to futures contracts for hedging. Thirdly, there is a clear market demand for index products within the crypto sector. Finally, with my background in equity derivatives from investment banking, I’ve witnessed firsthand how these products are utilized, making it a natural progression for the crypto market.
How are structured products evolving?
Historically, two key factors have impeded the widespread adoption of structured products: high volatility in the crypto markets often made simple spot trades lucrative, and the popularity of perpetual futures with high leverage diminished interest in options. However, this balance is shifting as more participants hold structured positions. Venture capital firms, portfolio managers using value-based allocations, and larger mandate holders require specific hedging solutions that perpetuals cannot provide due to their path-dependent nature.
What effect are crypto ETFs having on structured products?
ETFs act more as a “gateway” to structured products rather than threatening their existence. The rollout of products like the BlackRock ETF has attracted new investors to the crypto industry. As these individuals grow comfortable with crypto through ETFs, they are naturally drawn to explore more advanced products that offer enhanced returns or aid in risk management.
What trends in institutional demand for crypto structured products are you observing in Asia compared to other regions?
Asia generally exhibits a strong interest in auto-call structures, where investors sell downside protection or puts to achieve substantial coupons based on upward price targets. This contrasts with the more cautious approach seen in U.S. and European markets. My experience at JP Morgan and Morgan Stanley in equity derivatives trading has given me insight into these regional distinctions.
Australia occupies a middle ground, and at Zerocap, we have successfully converted non-structured product users into clients of crypto structured products. We aim to extend this expertise into Asia, subject to regulatory considerations.
Is there a risk of over-engineering the volatility out of crypto?
As the crypto landscape evolves, distinct assets commonly maintain different volatility patterns. While stablecoins offer stability and Bitcoin’s volatility might lessen with deeper institutional adoption, there remains ample room for high-volatility opportunities further down the market cap spectrum, from Solana to meme coins. The market is maturing to meet diverse investor needs. For portfolio diversification, whether it’s 1%, 2%, or 5%, investors seek broad beta exposure through established assets like Bitcoin and Ether, complemented by smaller allocations into emerging prospects.
What’s the most unusual structured product request you’ve encountered?
We stand out as one of the few desks globally that offers derivatives on alternative coins, leading to requests for some quite unconventional products. I can officially confirm that we’ve recently traded an option on FARTCOIN, which is quite notable for someone with a background in large U.S. banks!
Considering that, how do you envision the intersection of DeFi and traditional structured products?
While there are intriguing opportunities at the intersection of DeFi and structured products, it’s essential to recognize that the complexity of crypto is already substantial, and structured products introduce an additional layer of intricacy. Nonetheless, tokenization is beneficial for legal documentation and fungibility since it allows for auditing of source code to understand precisely what is being offered. This field will develop alongside real-world asset (RWA) tokenization, but widespread adoption may take time.
When do you anticipate that digital assets will transition into long-term investment vehicles?
The shift from trading instruments to long-term investments will happen as protocols and tokens establish clear value propositions and use cases. Bitcoin has already proven its status as digital gold, while the classification of Ethereum as “ultrasound money” is still under debate. Other protocols continue to vie for their place and demonstrate real value within the digital economy. As these assets integrate more fully into economic systems, their long-term value propositions will become increasingly apparent.
For further details, please visit https://zerocap.com/.