With The Sector Recording All-Time Highs, Crypto Derivatives Are Becoming A Vital Part Of Crypto Trading
The world of cryptocurrencies may become a huge financial power, as EQUOS prepares to become the first US publicly traded crypto exchange. The exchange runs under the umbrella of Hong Kong`s based Diginex. EQUOS is planning a “backdoor” NASDAQ listing for crypto assets spot trading, as well as trading for USDC. Further down the line, EQUOS would support perpetual swaps, dated futures, options, and other derivatives products.
The news solidifies the growing popularity of crypto derivatives, which started with bitcoin futures trading on the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) in late 2017. Since then, the crypto sector received massive recognition even despite the early 2018 crypto burst, when Bitcoin fell from its all-time high of little over $20,000. Futures trading enabled investors to hedge against Bitcoin’s price and minimize risks, associated with the severe volatility that the crypto sector endures.
Futures trading gives investors the chance to speculate on the future price of crypto assets without actually owning them when they open a position. Futures, forwards, swaps, and options can also be used as a price locking mechanism, further preventing investors from losses.
According to Tokeninsight, the crypto derivatives market accounted for $2.159 trillion in trading volumes in Q2 of 2020, which is a 2.57% increase from Q1 and a year-on-year increase of 165.56% (measured from Q2 2019). Also, open interest for bitcoin futures on the CME managed to record an all-time high of $841 million during the second week of August 2020.
Asia is leading the pack of crypto derivative hubs, as exchanges like OKEx and Binance are continuously reporting high trading volumes on their derivatives platforms. A part of the Asian hub’s success is that most Asian countries like Singapore for example, have a more liberal regulatory framework.
Meanwhile, crypto analysts are considering the institutional interest in crypto derivatives as the biggest moving force behind the sector. Simon Peters, an analyst at eToro, stated that “an increasing number of institutional investors are in support of Bitcoin as a potential inflation hedge,” while VP of Quantum Economics Charles Bovaird emphasized that the $841 million open interest in Bitcoin futures trading on the CME represents more than a 100-percent increase from $365 million in July.
“This development is a strong signal of the rising demand of institutional investors,” Bovaird concluded.
However, the crypto derivatives market maturing may be the key to the rise of interest. Despite the sector is rather new, the increase of liquidity and the evolution of risk-management tools are now reaching acceptable levels for further adoption. Solid growth was also recorded in crypto-derivative products such as swaps and options. Also, the rapid rise of decentralized finance (DeFi) managed to skyrocket futures interest in Ethereum, which is the foundation for most DeFi projects.
In fact, Ethereum futures open interest recorded an all-time high, as data from Skew shows ETH futures rising to $1.73 billion on August 14, surpassing the previous record of $1.45 billion from a week earlier. It was then followed by another peak on 1st September, as seen in the image below.
One of the regulators in the crypto space, the Office of the Comptroller of the Currency (OCC) recently estimated that banks and institutions have access to over $200 trillion in derivatives, highlighting the worldwide importance of derivatives. The data shows that crypto derivatives would become an important part of the mix of crypto traders, аs those tools successfully weaken and exercise control over speculation and risk management.