2020 has been the most important year for the crypto derivatives market so far. Bitcoin (BTC) and Ether (ETH) derivatives grew steadily throughout the year, with their futures products and options available on exchanges, such as Chicago Mercantile Exchange, OKEx, Deribit and Binance.
As of December 31, Bitcoin’s open options reached an all-time high of $ 6.8 billion, which is three times the OI seen 100 days earlier, signifying the speed with which the crypto derivatives market is growing amid to this bullish run.
The bullish 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 are looking to protect their bets against the market through derivatives of underlying assets like Bitcoin and Ether.
Institutional investors are bringing the main change
While there are a number of factors driving the growth of crypto derivatives, it is safe to say that this was driven primarily by the interest of institutional investors, considering that derivatives are complex products that are difficult for the average retail investor to understand.
In 2020, a variety of corporate entities, such as MassMutual and MicroStrategy, showed considerable interest in buying Bitcoin for their reserves or as treasury investments. Luuk Strijers, commercial director of the Deribit crypto derivatives exchange, told Cointelegraph:
“As Fink of Blackrock said, ‘cryptocurrency is here to stay’ and bitcoin ‘is a durable mechanism that can replace gold.’ Statements like these have driven recent performance, however, as a platform, we have seen new participants joining the year round. ”
Strijers confirmed that, as a platform, Deribit sees institutional investors entering the cryptographic space using trading instruments they are familiar with, such as spot and options, which has led to a huge growth in open contracts throughout 2020.
The Chicago Mercantile Exchange is also a prominent market for trading options and futures, especially for institutional investors, as CME is the world’s largest derivatives trading exchange across all asset classes, making it a family market for institutions . It has recently overtaken OKEx as the largest Bitcoin future market. A CME spokesman told Cointelegraph: “November was the best month of Bitcoin (ADV) future average daily volume in 2020, and the second best month since launch.”
Another indicator of institutional investment is the growth in the number of large open interest holders, or LOIHs, of CME’s Bitcoin futures contracts. A LOIH is an investor who has at least 25 Bitcoin futures contracts, with each contract consisting of 5 BTC, making the LOIH limit equivalent to 125 BTC – more than $ 3.5 million. The CME spokesman elaborated further:
“We had an average of 103 large open holders during the month of November, which is an increase of 130% year on year, and we reached a record of 110 large open holders in December. The growth of large open interest holders can be seen as an indicator of institutional growth and participation. “
The fact that the crypto derivatives market is now in demand is a sign of maturity for assets like Bitcoin and Ether. Similar to their role in traditional financial markets, derivatives offer investors a highly liquid and efficient way to protect their positions and mitigate the risks associated with the volatility of crypto assets.
Other macroeconomic factors are also putting pressure on demand
There are several macroeconomic factors that are also causing increased demand for the crypto derivatives market. As a result of the COVID-19 pandemic, several large economies, including the United States, the United Kingdom and India, were affected due to limited working conditions and rising unemployment.
This has prompted several governments to implement stimulus packages and to engage in quantitative easing to reduce the impact on the basic economy. Jay Hao, CEO of OKEx – a crypto and derivatives exchange – told Cointelegraph:
“With the pandemic this year and the responses of many governments to it with massive stimulus packages and QE, many more traditional investors are adopting Bitcoin as a potential protection against inflation. Cryptocurrency is finally becoming a legitimate asset class and that will only mean a greater increase in demand. “
There is growing interest from the mining community and other companies that generate revenue in Bitcoin, looking to protect their future earnings in order to be able to pay their operating expenses in fiat currencies.
In addition to institutional demand, there is also a significant increase in retail activity, Strijers confirmed: “The single monthly active accounts in our options segment continue to increase. The reasons are the general (social) media attention to the potential of the options. ”The CME spokesman also stated:
“In terms of new account growth, in the fourth quarter of 2020 to date, a total of 848 accounts have been added, the most we have seen in any quarter. In November alone, 458 accounts were added. In 2020 to date, 8,560 Bitcoin CME futures contracts (equivalent to around 42,800 bitcoin) were traded on average each day. “
Ether derivatives grow due to DeFi and Eth2
In addition to Bitcoin futures and options, Ether derivatives also grew tremendously in 2020. In fact, CME 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 life. cycle.
Previously, the crypto derivatives market was monopolized by products that used Bitcoin as an underlying asset, but in 2020, Ether derivatives grew to have a significant share of the pie. Strijers later elaborated:
“When we look at the value of turnover in USD, we see that in Deribit BTC derivatives contributed most of the volume, however, the percentage decreased from ~ 91% in January to ~ 87% in November. During the peaks of the summer DeFi, the percentage of BTC dropped to the mid-seventies due to the increase in ETH activity and momentum. “
The reason why Bitcoin derivatives make up a larger portion of the cryptographic derivatives market is that BTC is now well understood by the market and has received validation by major institutions, government agencies and several prominent traditional investors. However, in 2020, several factors influenced the demand for ether derivatives as well. Hao believes that “DeFi’s huge growth in 2020 and the launch of the ETH 2.0 Beacon chain have definitely spurned more interest in Ether and therefore Ether derivatives.”
However, although Ether continues its bullish run alongside Bitcoin and is likely to see a further increase in demand for derivatives, it is highly unlikely that BTC will be overtaken anytime soon. Hao further elaborated: “We will see growing demand for these two products, however, BTC as the number one cryptocurrency is likely to experience the most dramatic growth as more institutional dollars flood the space.”
2021 must be a crucial year
Beginning with the launch of CME’s Ether futures product in February, this year should be an even bigger year for crypto derivatives if the bullish race continues. The market has also recently witnessed the largest option expiration so far, with nearly $ 2.3 billion in BTC derivatives maturing 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. So it looks like the crypto derivatives market is still in its early stages and is expected to grow exponentially as the industry expands. As volumes increase, markets tend to become more efficient and offer better price discovery for the underlying asset, as Strijers added:
“Due to the general increase in market interest, […] we see more market makers quoting our instruments, increasing our ability to launch more series and maturities, reducing the spreads that act as a fulcrum for more interest as execution becomes cheaper and more efficient ”.
In addition to Bitcoin and Ether derivatives, there are altcoin derivative products that are offered on various exchanges, most popularly perpetual swaps, but also options and futures. Hao elaborated more on these products and their demand prospects:
“Many other altcoins are already on offer to trade derivatives, particularly in perpetual swaps, but also in futures. […] The demand for this is largely driven by retail traders, as some of these assets have yet to earn the trust of institutional traders. ”
Although institutional investors are not switching to derivative products for these altcoins yet, that should change with the growth of decentralized financial markets and the use cases they can offer. Ultimately, this could translate into an increase in demand for more crypto derivatives in the near future.