2020 has so far been the most important year for the crypto-derivatives market. Both Bitcoin (BTC) and Ether (ETH) derivatives have grown steadily throughout the year, with their futures and options available in exchanges such as the Chicago Mercantile Exchange, OKEx, Deribit and Binance.
As of December 31, the public interest of the Bitcoin options reached a peak of $ 6.8 billion, which is three times the OI seen 100 days earlier, indicating the speed with which the crypto-derivatives market is amid this bull run grows.
The bull run has led to many new investors entering the market amid the uncertainty plaguing traditional financial markets due to the ongoing COVID-19 pandemic. These investors want to protect their commitment to the market through derivatives of underlying assets such as Bitcoin and Ether.
Institutional investors bring about the most important change
Although there are several factors that drive the growth of crypto-derivatives, it is safe to say that it was driven primarily by interest from institutional investors, as derivatives are complex products that are difficult for the average small investor to understand.
In 2020, a variety of corporate entities such as MassMutual and MicroStrategy showed great interest by buying Bitcoin for their reserves or as treasury investments. Luuk Strijers, trading officer of Deribit, exchanges for crypto-derived instruments, told Cointelegraph:
‘As Blackrock’s Fink puts it:’ cryptocurrency is here to stay ‘and bitcoin’ is a durable mechanism that can replace gold. Statements like these have been the driving force behind the recent performance, but as a platform we have seen new entrants join in throughout the year. ”
Strijers confirmed that Deribit sees as a platform for institutional investors to enter the crypto-space using trading instruments they are familiar with, such as spot and options, which led to the tremendous growth in public interest during 2020.
The Chicago Mercantile Exchange is also a prominent market for trading options and futures contracts, especially for institutional investors, as the CME is the largest exchange for derivatives in various asset classes, making it a well-known institutional market. It recently even surpassed OKEx as the largest Bitcoin futures market. A CME spokesman told Cointelegraph: “November was the best month of Bitcoin’s average futures contract in 2020, and the second best month since its launch.”
Another indication of institutional investment is the growth in the number of large open stakeholders, or LOIHs, of CME’s Bitcoin futures. A LOIH is an investor who holds at least 25 Bitcoin futures contracts, and each contract consists of 5 BTC, which is the threshold of LOIH equivalent to 125 BTC – more than $ 3.5 million. The CME spokesperson further expanded:
“We kept an average of 103 large holders of public interest during November, which is an increase of 130% compared to year-on-year, and reached a record 110 high interest rate holders in December. The growth of large stakeholders can be seen as an indication of institutional growth and participation. ”
The fact that the crypto-derivatives market is now in demand is a sign of maturity for assets such as Bitcoin and Ether. Similar to their role in traditional financial markets, derivatives offer investors a very liquid, efficient way to hedge their positions and reduce the risks associated with the volatility of crypto-assets.
Other macroeconomic factors also push demand
There are several macroeconomic factors that also increase the demand for the crypto-derived market. As a result of the COVID-19 pandemic, several major economies, including the United States, the United Kingdom, and India, have been stressed by limited working conditions and rising unemployment.
This has led several governments to introduce stimulus packages and provide quantitative easing to reduce the impact on the base economy. Jay Hao, CEO of OKEx – an exchange of crypto and derivative instruments – told Cointelegraph:
“With the pandemic this year and the reactions of many governments to it with massive stimulus packages and QE, many more traditional investors are pulling in Bitcoin as a possible inflation hedge. Cryptocurrency is finally becoming a legitimate asset class and this will only mean a greater increase in demand. ”
There is a growing interest from the mining community and other companies earning income in Bitcoin to hedge their future earnings to be able to pay their operating expenses in fiat currencies.
In addition to the institutional demand, there is also a significant increase in retail activity, Strijers confirmed: ‘The unique accounts that are active monthly in our options segment continue to rise. Reasons are overall (social) media attention to the potential of options. The CME spokesperson also said:
“As far as the growth of new accounts is concerned, a total of 848 accounts have been added so far in Q4 2020, the most we have seen in any quarter. In November alone, 458 accounts were added. As of 2020 to date, 8,560 CME Bitcoin futures (equivalent to approximately 42,800 bitcoin) have traded on average every day. ”
Ether derivatives grow due to DeFi and Eth2
Apart from Bitcoin futures and options, Ether derivatives also grew tremendously in 2020. In fact, the CME has even announced that it will launch Ether futures in February 2021, which in itself is a sign of the maturity that Ether has reached in its lifetime. cycle.
Previously, the crypto-derivatives market was monopolized by products using Bitcoin as the underlying asset, but by 2020, Ether-derivatives have grown into a significant portion of the pie. Strijs expanded it further:
‘If we look at the dollar value of turnover, we see that on Deribit the BTC derivatives contributed the bulk of the volume, but the percentage decreased from ~ 91% in January to ~ 87% in November. During the peaks of the DeFi summer, the BTC percentage dropped to the mid-seventies due to the increased ETH activity and momentum. ”
The reason Bitcoin derivatives make up a larger share of the crypto-derivatives market is that BTC is now well below the market and that it has been empowered by large institutions, governing bodies and several leading traditional investors. In 2020, however, there were also several factors that influenced the demand for Ether derivatives. Hao believes that “the enormous growth in DeFi in 2020 and the launch of the Beacon chain of ETH 2.0 have certainly led to more interest in Ether and therefore in Ether derivatives.”
Although Ether will continue its runs alongside Bitcoin and is likely to have a further increase in demand for derivatives, it is highly unlikely that BTC will catch up soon. Hao further elaborated: “We will see an increasing demand for both of these products, but BTC, as the number one cryptocurrency is likely to see the strongest growth as more institutional dollars flood the space.”
2021 is an important year
Starting with the launch of CME’s Ether futures product in February, this year will be an even bigger year for crypto-derivatives as the bull run continues. The market also recently saw the biggest expiration of options, with nearly $ 2.3 billion worth of BTC derivatives expiring at Christmas.
With traditional markets, the derivatives market is several times larger than the spot market, but it is still the opposite with crypto markets. It therefore appears that the market for crypto-derivatives is still evolving and that it will grow exponentially as the industry grows. As volumes increase, markets tend to become more efficient and offer better price tracking for the underlying asset, as Strijers added:
“Due to the overall increase in market interest, […] we are seeing more market makers quoting our instruments, increasing our ability to launch more ranges and expirations, sharpening the spreads, serving as a support for further interest as execution becomes cheaper and more efficient. ”
Apart from Bitcoin and Ether derivatives, there are altcoin derivative products offered on different exchanges, the most popular are perpetual barter transactions, but also options and futures contracts. Hao expanded further on these products and their demand prospects:
‘Many other altcoins are already being offered to trade derivatives, especially in perpetual exchange, but also in futures contracts. […] The demand for this is mainly driven by retailers, as some of these assets have not yet won the trust of institutional traders. ”
Although institutional investors are not yet flocking to the derivatives of these altcoins, this will change with the further growth of decentralized finance markets and the use cases they can offer. Eventually, this could lead to an increase in demand for more crypto-derivatives in the near future.