How Crypto Derivatives are Driving New Entrants into the Digital Asset World

by | Dec 31, 2020 | Industry | 0 comments

Eleven months since the onset of the COVID-19 and the pandemic continues to negatively affect the global economy. But the trading of crypto derivatives has been on the rise throughout this period. The digital asset market is maturing as use cases for real-world solutions and new wealth generation models drive worldwide adoption. At the same time, trading volumes have increased as investors see digital assets as a better inflation hedge. Crypto derivatives, in particular, have become desirable because of their power to control risk and generate profits. 

Derivatives are an integral foundation for almost all market development cycles. Besides, with the heightened popularity of cryptocurrency trading, it is an important topic to understand.  

A Brief History of Derivatives 

Contrary to traditional financial markets, derivatives sprung before initial margin was largely authorized in the digital asset world- which typically acts as a prerequisite for the launch of derivatives. Derivatives eventually apply leverage to enter positions and a recognized lending/margin system is also needed. The point that derivatives emerged way before margin trading shows how the digital asset space has evolved significantly and quicker than traditional financial markets.

Three years ago, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) launched the first crypto futures contracts. The launch further demonstrated a strategic signal from two big firms that crypto derivatives had a bright future. 

When Bitcoin started trading on the CME and CBOE markets, the initial margin- the collateral an investor must submit to trade a contract- was 43% for the CME and 44% for the CBOW contract. Remember margin levels are subject to change and, due to Bitcoin’s volatility, were set higher compared to other major futures contracts. 

In the subsequent years, the launch boosted trade volumes across regulated exchanges in comparison with trading products that are set to back the growth of crypto derivatives. 

The Growth of Crypto Derivatives

To depict the growth of derivatives, the earlier crypto investors majorly traded with a buy-or-sell perspective. With the maturation of the digital asset market and the growth of crypto derivatives, traders now enjoy several strategies to generate wealth.   

Since the crypto market is majorly tied to crypto-based derivatives, there are few products i.e., perpetual contracts/swaps, futures/forward contracts and options. On the other hand, traditional markets have numerous products because of an extensive number of underlying assets. 

However, the little number of products in the crypto space has not limited derivatives from growing. Since the onset of Corona Virus, the crypto derivative market has made major strides, hitting an all-time high (ATH) open interest of $7.4 billion in November- largely because of its ability to manage risk and create profits.  

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