Derivative boom: a threat or new market opportunity

    Bitcoin futures

    Derivatives based on cryptocurrencies have been on the market for three years, but for a long time on bitcoin- futures did not pay much attention due to the small volume of trading in contracts and the small sites offering such services.

    But in 2020, the situation is changing rapidly - the derivatives market is growing, increasing the impact on the underlying asset. What is the dynamics of the cryptocurrency contract market and how does it threaten coins?

     Cryptocurrency derivatives: historical high In the first quarter of 2020 , the trading of cryptocurrency derivatives was 314% higher compared to the same period last year:

    Динамика объема сделок с криптовалютными деривативами
    Dynamics of the volume of transactions with cryptocurrency derivatives

    At the same time, there is also an increase in the share of derivatives in the total trading volume - I agree report in the first quarter it amounted to 39.08%. Bitcoin remains the dominant in the futures market, with a total share of contracts of 78%:

    Структура рынка деривативов по базовым активам
    Derivatives market structure for underlying assets


    However, this is general quarterly data. A more detailed analysis of the period allows you to see an ambiguous picture with peaks of activity and falling interest of traders:

    Суточные объемы торгов биткоин-фьючерсами за февраль-апрель
    Daily trading volumes of bitcoin futures for February-April

    So, Binance on April 30, 2020 reported record volumes on futures - $ 10 billion:

    Объемы торгов биткоин-фьючерсами на Binance
    Trading volumes of bitcoin futures on Binance

    The same peak is confirmed by the skew data on open interest (the number of open contracts) bitcoin futures Ovs on the CME:

    Динамика открытого интереса к биткоин-фьючерсам на СМЕ за январь-март
    Dynamics of open interest in Bitcoin futures on the CME for January-March

    As well as data from Arcane Research:

    Динамика открытого интереса к биткоин-фьючерсам на СМЕ с мая 2019-го по апрель 2020-го
    Dynamics of open interest in Bitcoin futures on CME from May 2019 to April 2020

    The latest chart shows the trend an increase in the volume of open CME futures, which may be associated with bitcoin halving . Also, by the end of April, on Bitfinex , long-term positions in ETH futures increased, which is associated with the upcoming network upgrade to version 2.0:

    Рост долгосрочных ETH-фьючерсов на BitMEX
    Long-term growth ETH-futures on BitMEX

    However, while BitMEX (3rd place in the TokenInsight ranking in derivatives trading volume) in April lost 40% of active users:

    [ 19459036]

    Which, quite possibly, simply switched to OKEx , where traffic for the same period grew by more than 200%:

    [ 1945 9007]

    But a study by The Block shows that by the end of March, futures' open interest dipped by 60% compared with February figures:

    Динамика открытого интереса на биткоин-фьючерсы за октябрь 2019-го — март 2020-го
    Dynamics of open interest in bitcoin futures for October 2019 - March 2020

    Did it recover in April, taking into account activity at the end of the month? The exact numbers will only give a new study.

    Thus, the main trading volume was formed in February and at its peak - March 12, April 30 and others. If these peaks are not taken into account, then since February the interest of traders in derivatives has subsided significantly, which is confirmed by all the charts given. And although we have seen an uptrend since the end of April, it’s too early to say how stable it is, whether it will be able to bring derivatives “to the moon” or is it another local peak. However, 300% by volume is a stubborn fact and requires explanation.

    What is the reason for the growth?

    Рост фьючерсов на биткоин
    The growth of bitcoin futures

    Such a rapid growth of crypto derivatives in 2020 is due to several reasons:

    [19909009] [1990 ]

    The advent of options

    In January, CME opened options for bitcoin and closed the first day with a volume of over $ 2 million. Before them, options at the beginning of December 2019- Bakkt has already managed to launch , and by the end of the year OKEx was also tightened.

    Actually the February peak of trading fell on the period after the launch of options on the largest platforms. Apparently, this derivative is more interesting for traders than futures, although TokenInsight did not provide data on the structure of the options market, limiting itself only to futures.

    The main difference between an option and a futures is that the futures oblige the buyer to purchase the asset within the specified period at the agreed price, and the option gives the right to buy or refuse. In this case, the seller must transfer the asset, if the buyer wants one.

    Thus, the freedom of action of the option holder is greater than that of the futures owner.

    Industry development and regulation

    At the beginning of the year, Kraken announced about expansion into the Russian market, and They planned to start with the launch of futures. In The Block they also say that by the end of the year Binance will open options, and the FTX platform, in which the exchange invested, has already managed to do this on January 13 - simultaneously with CME.

    In this case, an impressive trading volume, according to TokenInsight, falls on the United States:

    Торговая активность по странам и количество фолловеров крупнейших бирж в Twitter
    Trading activity by countries and the number of followers of the largest exchanges on Twitter

    There are currently three regulated areas that sell derivatives - Bakkt, CME and ErisX. At the same time, Bakkt started in 2019, ErisX began supplying Ethereum futures in May 2020, and CME only launched options at the beginning of this year. The rest cannot offer residents of the US legal derivatives trading. The CFTC even announced a competition to develop new tools to track unlicensed trading offers:

    Apparently, in the near future violators who are on the “red list” are awaiting sanctions, and The government has set its sights on the full regulation of the cryptocurrency market, including derivatives.

    Therefore, on unregulated derivatives exchanges, the main traffic is generated by residents of Asia, Australia and Europe. Although in the EU, life on such sites was somewhat complicated by the entry into force of the fifth edition of the AML rules.

    It is noteworthy that according to TokenInsight only 3 sites in the US generate almost the same trading volume as Singapore, where all unregulated exchanges can work, overtaking even Gon -Kong.

    Licensing in the United States and other exchanges will open sites to access new customers and can significantly increase volumes.

    Technical changes

    For Ethereum is primarily an expected update to version 2.0, which should be marked by the transition to PoS and increased network bandwidth. That is why the volume of long positions in ETH futures has grown - traders believe that after the update the value of the coin will increase.

    For bitcoin - halving. And while estimates of its effects are still rather mixed, an increase in derivatives trading indicates that traders are set to make a profit, at least in the short term.

    Financial opportunities

    Derivatives allow you to get profit with X in a very short time, and in March bitcoin is very shook, along with the rest of the market.

    Due to the correlation between the growth in derivatives trading and the “swing”, some analysts expressed concern about the peak of April 30 - which could indicate that in the near future players expect significant volatility . And here is the Bitcoin exchange rate in the first half of May:

    График стоимости Bitcoin с 1 по 14 мая
    Graph of the Bitcoin value from May 1 to May 14

    And this is the annual schedule: [ 19459009]

    График стоимости Bitcoin с мая 2019-го по май 2020-го
    Graph of Bitcoin value from May 2019 to May 2020

    Bitcoin, of course, never differed in a predictable rate, but starting in August, price changes occurred irregularly with relatively stable plateaus, but in May the schedule became more chaotic.

    Possible consequences

    Трейдинг криптовалютными деривативами
    Cryptocurrency derivatives trading

    For the industry, the development of the derivatives market has both positive and negative effects. Of the main advantages:

    A new way to use cryptocurrency

    We have already seen how the cryptocurrency broke its development channel in the form of De-Fi , even closer in functionality to traditional financial instruments.


    Derivatives are also direction for traders, and strengthen the crypto not only as a means of settlement, but also as a resource with which you can trade and earn money on it.

    Attracting new market participants

    Trading derivative instruments is an entire sector in trading activity, and the emergence of cryptocurrency futures and options could not remain out of sight of participants in this sector. Moreover, as can be judged by the above data, it is the options that attract new traders specializing in derivatives trading.

    In combination with the relative volatility of the market, these instruments offer opportunities for high returns. And the more participants in the industry, the closer the day of the full adoption of cryptocurrency.

    However, there are risks for currencies that are the basis of derivatives, in particular these are:

    Transfer of funds

    If we take capitalization as the main criterion , then the cryptocurrency market and the derivatives market are not connected from the word at all - investing in a contract, the trader does not invest in a coin, because does not buy it, but only undertakes to buy it.

    Since contracts provide a larger field for maneuver and earnings, it is often more profitable to invest in a contract. For example, when the price drops, the trader does not buy a cheap asset, but a cheap asset futures, fixing a low cost. In the future, the price will rise, and he will receive:

    • Or cryptocurrency - then his capital will return to the asset;
    • Or fiat compensation - then his capital with profit will remain with him;
    • Either the profit from the resale of his futures at a higher price - then he will also have the capital.

    That is, derivatives pump money from traders from the main asset, and although the contract seems to fix the fact that the trader will return the money in the future, having received the asset, in fact it doesn’t work like that. For example, Bakkt offers a choice of futures with the physical delivery of an asset or with the payment of its value in fiat. And the April skew data show that the former account for an average of 67%:

    Объем торгов биткоин-фьючерсами различных типов на Bakkt
    Trading volume of various types of bitcoin futures on Bakkt

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    It seems to be not bad, only Bakkt is the only platform with bitcoin futures with physical delivery.

    Neither CME nor other futures exchanges offer this type of contract when making payments on fiat futures.

    Violation of pricing

    Cryptocurrency value is formed on the basis of supply and demand - the main postulate and reason for pride of bitcoin and alt . Here are just derivatives that violate the balance of supply and demand.

    In theory, a futures or option is a deal to buy a coin, i.e. An increase in derivatives trading should increase the number of transactions with the asset itself, and, therefore, increase demand and value. But then again, traders buy or sell only the right to a coin, often without it. For example:

    1. A sells B one bitcoin, B sells it B, C sells D - total 3 transactions with currency.
    2. A sells one Bitcoin futures, B sells futures B, C sells futures G - a total of 3 transactions with derivatives, but only G can get a coin if he does not agree to its value in fiat. So there will be only one deal and only if G needs Bitcoin.

    CoinShares investment company’s chief strategist, Meltem Demirors, believes that with the development of the derivatives market, the market price of bitcoin will increasingly depend on its intrinsic value:


    Decrease in functional value

    This problem arises from the previous ones - if bitcoin and other coins are interesting only as a basis for derivatives, then they will be used for their intended purpose. less and less. Those. they will trade in rights to coins, which, figuratively speaking, can “gather dust” on wallets for years and never be transferred until the owner of these rights wants to exercise them.

    This creates a bubble and the same gap between market and domestic value - the market can be supported by growing demand for contracts, and the domestic one will fall because people will simply stop using the coin.

    Sooner or later, the bubble will simply burst. Of course, the bubbles were inflated even without derivatives, but they were triggered by the information tension, which was unstable, and futures and options allow them to be fixed and maintained for some time without much effort.

    Ever since the launch of bitcoin futures on CME, derivatives have dubbed the "killer of bitcoin" and they really became one of the reasons for the January fall of 2017, but when bitcoin became less interested in traders and more ordinary users, their impact on the market decreased significantly.

    However, now the situation is changing - volumes have tripled, as well as the share of contracts in the total volume of transactions, options have appeared and there is a growing tendency to form large currency holders that can generate derivatives without releasing the asset to the market. Does this mean that in the near future we will see a derivative bitcoin bubble?

    Read also:

    National digital currencies - how far countries have advanced in this matter

    Stablecoins: a safe haven for the period crisis

    PlusToken: the pyramid that shook the course of bitcoin

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