Key Takeways
- In an effort to draw in risk-averse investors, cryptocurrency trading platforms are putting more and more emphasis on derivatives products.
- The upcoming launch of D2X and other derivatives platforms signals increased competition in a market that is now controlled by CME Group.
- Open interest in derivatives has topped $40 billion for the first time this year and now accounts for 71% of all bitcoin trading volumes.
- The use of digital coins as collateral for cryptocurrency derivatives is being investigated by well-known financial institutions such as BlackRock.
- Cryptocurrency futures carry risks and the potential for increased losses, notwithstanding the appeal of leveraged trading.
Cryptocurrency trading platforms are shifting towards derivatives products to attract risk-averse investors. D2X, a Dutch futures and options marketplace, is set to open next month. GFO-X and One Trading, based in London, will introduce their products early next year.
These new players join Kraken, which has launched a Bermuda platform. Growing rivalry in a market dominated by Bybit, Binance, and CME Group is indicated by the expansion of derivatives platforms.
Derivatives account for 71% of total bitcoin trading volume
The Financial Times reports that 71% of digital asset trading volumes involve futures and options trading, with open interest in cryptocurrency derivatives surpassing $40 billion for the first time this year. Derivatives are popular for increasing exposure through borrowing, according to Jason Urban, global head of trading at Galaxy Digital.
The 2022 market meltdown led to a gap in the lending market, with lenders like Celsius, BlockFi, and Genesis failing. To gain exposure to cryptocurrency without upfront payments, traders are using derivatives. Exchanges are allowing investors to borrow up to 125 times the initial investment amount on platforms like Bybit and 50 times leverage on Kraken.
The cryptocurrency hedge fund Strix Leviathan is showcasing new products and features to traders, according to Nico Cordeiro, CEO of Strix Leviathan. CME Group reported a 27% increase in average daily volume (ADV) to 28.3 million contracts in Q3, highlighting the need for global risk management. The company’s CEO, Terry Duffy, emphasized the company’s record-breaking performance in the third quarter.
More Businesses Want to Get Into the Crypto Derivatives Industry
BlackRock, the world’s largest asset manager, is in talks with major cryptocurrency exchanges like Binance, OKX, and Deribit in partnership with its brokerage partner Securitize to boost the number of transactions using its $BUIDL token as collateral for trades in cryptocurrency derivatives, according to a Bloomberg article.
Crypto prime brokers FalconX and Hidden Road accept the BUIDL token as collateral for institutional investors with a $5 million minimum commitment. Komainu allows qualified customers to trade BUIDL through Hidden Road. Bitstamp now trades cryptocurrency futures in the EU with a MiFID MTF license, allowing perpetual swaps and other crypto derivatives products in the area.
Coinbase is acquiring a Cyprus-based company with an EU regulatory license to introduce regulated cryptocurrency derivatives in the European market. Meanwhile, blockchain analytics company Arkham Intelligence plans to open a bitcoin derivatives exchange in the Dominican Republic, with regulatory approval nearing. Both companies aim to introduce regulated cryptocurrency derivatives on the European market.
Hazards Associated with Trading Crypto Derivatives
Cryptocurrency futures trading is gaining popularity among investors, but it comes with inherent risks. Leverage in derivatives can magnify gains and losses, increasing the risk of losing not only the original investment but potentially more.
Liquidity risk, particularly for derivatives with smaller trading volumes, is a significant concern. Slippage can occur due to difficulties in entering or exiting positions without affecting market prices. Trading with third-party exchanges or brokers exposes traders to counterparty risk due to financial troubles or fraudulent actions. The trading environment can be complicated by technical issues like platform outages or cyberattacks, necessitating risk management techniques to mitigate these hazards.
The Bottom Line
More than 70% of all digital asset trading volumes are currently traded in cryptocurrency derivatives, indicating that investors are using these instruments to take advantage of leveraged trading opportunities in regulated settings.
A rising number of cryptocurrency companies and even financial institutions are attempting to enter the crypto derivatives market in order to take advantage of this opportunity. Although there are hazards for investors, this is just another instance of how cryptocurrency is using well-known technologies as it makes its way into the TradFi space.
