2020 is by far the most important year for the cryptocurrency derivatives market. Bitcoin (BTC) and Ethereum (ETH) derivatives have grown steadily during the year, and their futures and options products can be easily traded on exchanges such as Chicago Mercantile Exchange (CME), OKEx, Deribit, and Binance.
On December 31, the open position of Bitcoin options hit a record high, reaching $6.8 billion, three times the amount 100 days ago. This shows that the cryptocurrency derivatives market has grown rapidly in this bull market.
Due to the continuation of the new crown pneumonia pandemic, traditional financial markets are plagued by uncertainty, and the bull market has brought a large number of new investors into the crypto market. These investors hope to hedge their bets on the market through derivatives of basic assets such as Bitcoin and Ethereum.
Institutional investors are bringing key changes
Although there are many factors driving the growth of cryptocurrency derivatives, it is certain that considering that derivatives are complex products that are difficult for ordinary retail investors to understand, their growth is mainly driven by the interest of institutional investors.
In 2020, various physical companies, such as MassMutual and MicroStrategy, have shown considerable interest in Bitcoin and purchased Bitcoin as a reserve asset or investment in government bonds. Luuk Strijers, chief commercial officer of Deribit, a cryptocurrency derivatives exchange, told Cointelegraph:
“As BlackRock’s Fink said,’cryptocurrency will continue to exist’, and Bitcoin’is a durable consensus mechanism that can replace gold.’ This statement has promoted the recent rise of Bitcoin, but as a Platform, we see new participants joining throughout the year.”
Strijers said that as a platform, Deribit has seen institutional investors use their familiar trading tools such as spot and options to enter the crypto space, which has led to a huge increase in open positions throughout 2020.
The Chicago Mercantile Exchange is also a well-known options and futures trading market, especially for institutional investors. CME is the world’s largest cross-asset class derivatives exchange, so it is a market familiar to institutional investors. It even surpassed OKEx recently as the largest Bitcoin futures market. A CME spokesperson told Cointelegraph: “November is the month with the highest average daily trading volume (ADV) of Bitcoin futures in 2020, and it is also the month with the second highest ADV since the launch of Bitcoin futures.”
Another indicator of institutional investment is the growth in the number of large open interest holders (LOIHs) in CME Bitcoin futures contracts. LOIH is an investor who holds at least 25 Bitcoin futures contracts, and each contract consists of 5 Bitcoins, so each LOIH holds at least 125 Bitcoins (over 3.5 million USD). The CME spokesperson further elaborated:
“In November, we held an average of 103 large open interest holders, an increase of 130% year-on-year. In December, the number of large open interest holders reached a record 110. Large open positions The increase in the number of contract holders can be seen as a sign of the increase and participation of institutional investors.”
The fact that there is strong demand in the cryptocurrency derivatives market today shows that assets such as Bitcoin and Ethereum have matured. Similar to their roles in traditional financial markets, derivatives provide investors with a highly liquid and efficient way to hedge their positions and reduce the risks associated with the volatility of encrypted assets.
Other macroeconomic factors are also driving market demand
Several macroeconomic factors have also contributed to the increase in demand for cryptocurrency derivatives. Due to the new crown pneumonia pandemic, several large economies, including the United States, the United Kingdom, and India, are under pressure due to limited working conditions and rising unemployment.
This has led the governments of some countries to launch economic stimulus plans and implement quantitative easing policies to reduce the impact on the basic economy. Jay Hao, CEO of cryptocurrency and derivatives exchange OKEx, told Cointelegraph:
“With the new crown pneumonia pandemic this year, and many governments have responded with large-scale economic stimulus plans and quantitative easing policies, more and more traditional investors are turning to Bitcoin as a potential inflation hedging tool. Cryptocurrency will eventually become a legal asset class, which will only mean greater growth in its demand.”
The mining community and other companies that use bitcoin to generate revenue are increasingly interested in cryptocurrencies. They hope to hedge future earnings with cryptocurrencies so that they can pay operating expenses in fiat currency.
In addition to institutional demand, retail activity has also increased significantly. Strijers said: “In our options market, the number of unique accounts that are active every month continues to increase. The reason is that the entire (social) media community is paying attention to the potential of options. This CME spokesperson Also said:
“In terms of new account growth, as of the fourth quarter of 2020, a total of 848 new accounts were added, the most new account in history. In November alone, 458 new accounts were added. Since 2020, On average, 8,560 CME Bitcoin futures contracts (approximately 42,800 Bitcoins) are traded every day.”
Ethereum derivatives grow due to DeFi and ETH2.0
In addition to Bitcoin futures and options, Ethereum derivatives have also seen tremendous growth in 2020. In fact, CME announced that it will launch Ethereum futures in February 2021, which itself is a sign that Ethereum has reached maturity in its life cycle.
Previously, the cryptocurrency derivatives market was monopolized by products with Bitcoin as the underlying asset, but in 2020, the growth of ethereum derivatives accounted for a large share of the cryptocurrency derivatives market. Strijers further elaborated:
“From the perspective of USD transaction volume, we see that on Deribit, BTC derivatives contributed most of the transaction volume, but this proportion dropped from 91% in January to 87% in November. During the DeFi summer frenzy, With the growth of ETH activity and momentum, BTC derivatives trading volume has dropped to around 70%.”
The reason why Bitcoin derivatives account for a larger share of the cryptocurrency derivatives market is that Bitcoin is now well known by the market and has been recognized by large institutions, regulatory agencies and some well-known traditional investors. However, there are also several factors that will affect the demand for Ethereum derivatives in 2020. Jay Hao believes that “the huge growth of DeFi in 2020 and the launch of the ETH 2.0 beacon chain will definitely make investors lose more interest in Ethereum and Ethereum derivatives.”
However, even if Ethereum continues to rise with Bitcoin, and the demand for its derivatives may increase further, it is unlikely that Bitcoin will be replaced in a short period of time. Jay Hao further elaborated: “We will see growing demand for these two products. However, as more and more institutional funds flood into the Bitcoin market, Bitcoin as the number one cryptocurrency may experience the fastest growth. .”
2021 will be a crucial year
Starting from the launch of Ethereum futures products by CME in February this year, if the bull market continues, 2021 will be a more important year for cryptocurrency derivatives. Recently, the Bitcoin market has also witnessed the expiration of the largest option to date. Nearly $2.3 billion in Bitcoin derivatives has expired on Christmas 2020.
In the traditional market, the derivatives market is several times larger than the spot market, but the crypto market is still the opposite. Therefore, the cryptocurrency derivatives market seems to be still in its early stages and will grow exponentially as the industry scales. As trading volumes increase, the market tends to become more efficient and provide better price discovery for the underlying asset, as Strijers added:
“Due to the overall increase in market interest, we see more market makers using our bilateral quotation mechanism, which will push us to launch more series of products and expiring option contracts, and will help reduce spreads. As transactions become Cheaper and more efficient, the spread will become an important part of the further increase in investor interest.”
In addition to Bitcoin and Ethereum derivatives, there are also altcoin derivatives provided by various exchanges. The most popular ones are perpetual swap contracts, as well as options and futures. Jay Hao further described these products and their demand prospects:
“Many other altcoins can already support their derivatives transactions, especially perpetual swaps and futures. Demand for these assets is mainly driven by retail traders, because some of these assets have not yet gained the trust of institutional traders.”
Although institutional investors have not yet joined these altcoin derivatives, this situation will change with the further development of decentralized financial markets and the use cases they can provide. Ultimately, the demand for more cryptocurrency derivatives may rise in the near future.
