U.S. markets closed
  • S&P 500

    -54.85 (-1.51%)
  • Dow 30

    -500.10 (-1.71%)
  • Nasdaq

    -161.89 (-1.51%)
  • Russell 2000

    -10.21 (-0.61%)
  • Crude Oil

    -1.49 (-1.83%)
  • Gold

    -0.30 (-0.02%)
  • Silver

    +0.30 (+1.62%)

    -0.0018 (-0.19%)
  • 10-Yr Bond

    +0.0570 (+1.52%)

    +0.0043 (+0.38%)

    +0.2860 (+0.20%)

    -43.71 (-0.22%)
  • CMC Crypto 200

    +0.06 (+0.01%)
  • FTSE 100

    +12.22 (+0.18%)
  • Nikkei 225

    -484.84 (-1.83%)

Is a Cryptocurrency Derivatives Boom On Its Way?

While the crypto market continues to stall, some analysts are betting on institutions to carry the next bull cycle, opposed to casual traders who snowballed the BTC price in 2017. Indeed, the Wild West days of crypto, accompanied by thousands of cash-grabbing, fraudulent ICOs seem to be coming to a close — compliance is the general trend now. World-known corporations and banks like Facebook (NASDAQ: FB), Starbucks (NASDAQ: SBUX) and JPMorgan (NYSE: JPM) have entered the space, and, in order to save their reputation, they intend to play by the rules — only those rules have to be established first.

Crypto Derivatives: A Traditional Tool to Help the Market Grow

That’s where traditional markets could inspire crypto actors. Thus, the industry has started to push towards financial mainstream, and first results are already in. One of them is crypto derivatives, a niche version of the time-tested trading tool. Indeed, derivatives have proven useful in terms of the stock market, even in the post-crisis conditions: for instance, they expanded U.S. real GDP by about $3.7 billion each quarter over the 2003-2012 period, according to the Milken Institute research.

Equity derivatives for example — a class of derivatives whose value is based on the stock of a publicly traded firm — is one of the most popular offerings, as it allows people to gamble on the value of publicly traded corporations like Starbucks (NASDAQ:SBUX) and Facebook (NASDAQ: FB), or even a basket of large-cap stocks like FANG, which combines shares of the four high-performing technology stocks in the market.

Coming back to the context of cryptocurrencies, derivatives are financial contracts between two or more parties that derives (hence ‘derivatives’) their value from the underlying cryptocurrency. In other words, it is an agreement to buy or sell a particular cryptocurrency at a fixed price and a specified time in the future. Its most popular form — BTC futures — was introduced on two of the U.S.'s leading and diverse derivatives marketplaces, CME and CBOE, in December 2017, largely de-stigmatizing bitcoin as some marginal asset on the Internet.

Notably, the demand for such products has not only stayed, but grown bigger, too: in fact, June 2019 was the best month for CME’s bitcoin futures volume since its launch. Nearly 300,000 contracts were traded in the 31-day period, marking a 27 percent increase in volume on the month prior and a 73.69 percent increase on March volumes.

Since then, the exchange has applied to the U.S. Commodities and Futures Trading Commission (CTFC) for permission to double its open position limit. It’s also recently confirmed a January launch date for a new instrument: options on bitcoin futures.

Indeed, crypto derivatives are particularly important for institutions, since they represent a major risk managing technique: specifically, they offer protection from crypto’s infamous volatility (a massive red flag for blue-chip investors and corporations). Additionally, they allow traders to offset their potential losses via ‘put options’ and hedging — another essential instrument in the arsenal of institutional traders.

Main Actors in the space: LedgerX, Bakkt, Deribit, BitMEX

Putting out fully-compliant products is a considerably difficult task in the crypto market, given the continued lack of proper regulations. Exchanges attempting to launch new products have met with varying degrees of success. For example, U.S.-regulated clearing platform LedgerX attempted to race ahead of the competition to release a physically-settled bitcoin futures contract over the summer.

Ultimately, it was thwarted by the CTFC, much to the chagrin of the company’s CEO. Unlike conventional, cash-based BTC futures, the physically-delivered ones ensure that customers receive actual BTC tokens instead of fiat once the contracts expire.

In contrast to LedgerX’s efforts, Bakkt, a major exchange operated by the Intercontinental Exchange (ICE) and supported by a plethora of major companies including Microsoft and Stabucks, has made progress. In September, the company successfully launched it’s physically-settled bitcoin futures contracts after obtaining the necessary CFTC-issued license required. Since then, it has also announced it’s planning to launch options on bitcoin futures, ahead of competitor exchange CME.

Another leading exchange is Deribit, the Amsterdam-headquartered platform which is well-known for being the first true bitcoin options exchange. Currently, it’s the only exchange to offer the following three kinds of derivatives products at the same time: perpetual, futures and options. In fact, perpetuals — derivative products which are similar to futures, but don’t have an expiry date — are the most popular trading option on the platform.

Deribit is continuously expanding its services: earlier this year, it allowed the public to trade European, vanilla-style ethereum options for the first time in history. Most recently, it has joined forces with Paradigm, the first institutional-grade OTC communication platform, to launch a service for institutional crypto-derivatives traders. Specifically, the new service offers yet another trading feature, the so-called “block trades”: privately negotiated, principal-to-principal transactions in futures or options that exceed certain minimum quantity thresholds.

It’s a game-changer for institutional traders, as it safeguards them from another major crypto-problem, insufficient liquidity. Thus, block trades will allow them to trade in numerous transactions, avoiding slippage and minimizing impact on the market price (block trades are performed outside of the order book).

[caption id="attachment_791063" align="aligncenter" width="750"]

Deribit and Paradigm. First to offer crypto derivatives block trading for institutions.
Deribit and Paradigm. First to offer crypto derivatives block trading for institutions.

Deribit and Paradigm. First to offer crypto derivatives block trading for institutions.[/caption]

Most importantly, Deribit’s volume has been on a steady rise: in April 2019, even before the major uptrend on the market, its BTC options volume exceeded half a billion dollars in a month. In October, the company showed impressive growth in its Options market.


In comparison, the volume of BitMEX — another bitcoin derivatives platform and Deribit’s main competitor — has recently slumped as much as 33%, likely due a probe from the CTFC. However, even that didn’t stop them from reporting $1 trillion in annual trading volume earlier in July.

Crypto Derivatives Boom Could Arrive Any Moment Now

One thing is clear: crypto derivatives products are currently in large demand, and institutions seem to be the primary customer. Given the fact that institutions have historically had much more leverage compared to retail customers, the next crypto boom could be much more intense than the 2017 one. “We're seeing $200-400M a week in new crypto deposits come in from institutional customers,” Coinbase CEO has recently tweeted. The institutional money is coming, and it seems that the needed tools will be there ready.

Disclosure: None.