With the hope that stricter regulations and the prospect of very magnified profits will entice cautious investors into the market, cryptocurrency trading platforms are quickly branching out into derivatives.
While London-based One Trading and GFO-X intend to begin early next year, Dutch cryptocurrency futures and options venue D2X will launch next month.
Along with other recent derivatives entrants, such as Kraken from the US, which opened a venue in Bermuda this month, they will compete with industry stalwarts CME Group, Binance, and Bybit for a piece of the thriving market.
This year, the price of bitcoin has increased by almost 50% to over $67,000, and the market for digital assets is becoming more and more centered around derivatives.
According to CCData, 71% of all trading volumes in digital assets are in futures and options. This year, open interest in cryptocurrency derivatives, a measure of market depth, has surpassed $40 billion for the first time.
Derivatives are appealing to many traders in part because they let them to borrow large sums of money to boost their wagers in a market where credit was severely curtailed after the 2022 market crisis and has not yet recovered. Investors were previously given credit by big lenders like Genesis, BlockFi, and Celsius, but all have since failed and have not been widely replaced.
According to Jason Urban, worldwide head of trading at Galaxy Digital, “derivatives give you leverage.”
“People naturally want to find ways to get that leverage because the unsecured borrowing has gone away in the ecosystem since the collapse of many crypto lenders,” he added.
With derivatives, traders may get exposure to cryptocurrency tokens like bitcoin and ether for a fraction of the price of purchasing the token itself. According to their websites, investors may borrow up to 50 times the amount of their initial wager with Kraken and up to 125 times with Bybit.
As the price of bitcoin rises and the introduction of spot bitcoin and ether exchange-traded funds draws in new investors, traders claim that exchanges are shifting their focus to derivatives.
Large US exchanges are “aggressive” in their attempts to increase venue volumes, requesting to hop on a call and present traders with new features and products, according to Nico Cordeiro, chief investment officer of US crypto hedge fund Strix Leviathan. “It is a huge deal to be a regulated exchange,” he stated.
Chicago’s CME Group, the market leader, has set many records for open interest and trading volumes this year as investors swarm to the regulated exchange, which has introduced new derivatives contracts due to its popularity. These include weekly contracts that correspond to the New York trading week, such as Bitcoin Friday futures.
Regarding traditional exchanges fighting for customers, a cryptocurrency trader stated, “Every couple of days they’re like ‘what if we sweeten the pot this way’, ‘how can I get more of your business’…. they’re using every lever they can.”
Derivatives are particularly attractive since, in the spot, or cash, market, cryptocurrency trades are paid for in advance, leaving traders vulnerable to deal failures and rapidly depleting their trading capital.
Because “it’s the place where all these highly regulated investment managers can go get exposure,” Cordeiro said that the CME’s volumes are increasing. He also added that “it’s really the only place where you can get strong capital efficiency” in the US.
Additionally, a lot of investors have avoided trading the underlying tokens out of concern that the Securities and Exchange Commission, which has launched several cases against businesses for selling unregistered securities, may pursue them. Nevertheless, the regulator last week authorized bitcoin ETF options.
Therefore, in an attempt to reassure investors, new venues aimed for institutional traders are highlighting their adherence to laws.
Josh Barraclough, CEO of One Trading, stated, “We are the only venue in Europe that can offer perpetual futures and have retail and institutional customers directly on the same venue.” Although the business is headquartered in London, it is able to trade in the EU thanks to a regulatory license from the Netherlands.
In an attempt to get investors to trade in Europe, the business plans to launch a “intense marketing push in Europe” the next year, Barraclough continued.
In the meanwhile, Coinbase, which is listed on the Nasdaq, is completing the acquisition of a Cyprus-based company that holds an EU regulatory license, enabling it to introduce regulated cryptocurrency derivatives within the union.
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