Cryptocurrency production volumes set a new record in May 2020. The early generation of crypto investors mainly worked in storage and sales. With the inevitable evolution of the market and the rise of cryptocurrency derivatives, investors with different programs – such as the desire to trade Bitcoin volatility (BTC) in both directions, hedge against key market movements, reduce risk, etc. – are committed to this class of assets.
Derivative financial instruments are complex financial instruments that allow these programs to be implemented, but they are often confusing to inexperienced and inexperienced investors. Since derivatives are associated with an alternative class of assets, such as cryptocurrency, it becomes more difficult for the average investor to understand these tools and therefore make them more skeptical of these investments compared to traditional derivatives of a complex nature.
However, the crypto derivatives market is expanding rapidly, especially in the years since the crypto presentation in December 2017. The phase they reached in their life cycle can be compared to the early development of derivatives in traditional capital markets, such as the Chicago Board of Directors. Trading has become part of the Chicago Stock Exchange. Commercial, whose current fixed assets are mainly equities, bonds, currencies, commodities, indices and even interest rates.
Development of cryptographic derivatives
Since the early development of crypto derivatives on primary trading platforms such as ICBIT in 2011, they have aroused great interest among crypto market supporters with an average trading volume of around 1500 BTC per day. At that time, the only available product for traders was Bitcoin futures, and they allowed to calculate trading prices based on future prices and even helped them curb the price changes for Bitcoins.
Almost ten years after the COVID crisis, hit by the 2020 crisis, crypto derivatives reached a record $ 602 billion in May, while maintaining the dominance of major exchanges such as OKEx, BitMEX, Huobi and Binance. Among them, Huobi generated the largest revenue, reaching $ 176 billion and 29% on a monthly basis, followed by OKEx and Binance with $ 152 billion and $ 139 billion, respectively. However, it should be noted that CME futures in the same month showed a 44% volume decline, indicating a lack of institutional confidence in crypto derivatives in times of economic uncertainty.
Differentiation from traditional derivatives markets
High volatility in the crypto derivatives markets due to large movements in the base currency gives higher returns. According to a 2019 Eurekahedge study, the average return on cryptocurrency is 16%, compared to 10.7% on hedge funds, which are usually the most efficient funds in traditional capital markets. Pankaj Palani, CEO of Delta Exchange, a digital derivatives exchange in Singapore, discussed this difference with Quintelegraph:
“Revenue should be considered in relation to the risk that each unit exposes to achieving this return. Asset class volatility is a measure of the risk associated with an asset class. Crypto definitely has higher risk than classes of mature assets, and therefore returns should be higher to attract capital. ”
However, as BTC’s price stability increases, the magnitude of these abnormally high revenues will inevitably decline over time. Unlike most derivative markets, crypto-derivative indicators receive data from open markets 24 hours a day, seven days a week, providing longer trading periods for investors in different time zones.
Since the cryptocurrency market is mainly limited to derivatives, only a certain number of products are available: permanent contracts / exchanges, futures / futures and options. In traditional markets, the number of products is endless due to various types of underlying assets, and even those that are developing rapidly due to the ability to choose any of these products, such as additional debt obligations.
Although higher in relation to derivative instruments, the volumes cannot be compared due to the difference in the number of notes and cryptocurrencies. However, recent interest in options has served as a platform for many of the new option products in the US and Europe on exchanges such as Bitmex, OKEx, CME, CBOE, Deribit and Ledgerx. The chart below shows the monthly volumes of derivative instruments compared to the average monthly value of $ 13 trillion for derivative currency instruments