An exercise in drawing parallels.

The first cryptocurrency ETFs have recently been launched. This article briefly examines the concept of parallel markets (in particular that of a liquid proxy for an illiquid asset) and asks whether there are lessons to be learned for cryptocurrency markets from the development of the liquid real estate market. 

In academic Finance theory, ‘parallel markets’ are typically defined as unofficial markets for assets (equities, currencies, etc) which work at the same time, or parallel to, the official market. Examples would be exchange rates in countries where various form of XR restrictions and capital controls exist, debt markets where borrowers seek loans, but do not meet traditional lending criteria and, of course, the dark web.

The concept of parallel markets is also applied specifically in real estate markets where we talk about the Parallel Asset Pricing Model, which is the alternative pricing of the listed sector, relative to their underlying assets. Thus we talk about REITs being at a premium or discount to their underlying value, and at an implied yield above or below the valuer’s equivalent yield on the portfolio. We also talk about potential arbitrage opportunities between the two markets based on relative pricing. The purpose of a parallel market can therefore be either as a (liquid) substitute for exposure to an illiquid or expensive underlying asset, or as an unregulated way of gaining access to a market which would otherwise not be available.