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2020 has been the most important year for the crypto derivatives market so far. Bitcoin (BTC) and Ether (ETH) derivatives rose steadily throughout the year, with their futures and options available on exchanges such as the Chicago Mercantile Exchange, OKEx, Deribit, and Binance.
On December 31, open interest in Bitcoin options hit a record high of $ 6.8 billion, three times the OI seen 100 days before that, signifying the speed at which the crypto derivatives market is growing. in the middle of this bull run.
The bull run has led many new investors to enter the market amid the uncertainty plaguing traditional financial markets due to the ongoing COVID-19 pandemic. These investors seek to hedge their bets against the market through derivatives of underlying assets like Bitcoin and Ether.
Institutional investors are making the key change
While there are several factors driving the growth of crypto derivatives, it is safe to say that it was primarily driven by interest from institutional investors, given that derivatives are complex products that are difficult. to understand for the average retail investor.
In 2020, various corporate entities such as MassMutual and MicroStrategy showed considerable interest in purchasing Bitcoin either for their reserves or as cash investments. Luuk Strijers, commercial director of crypto derivatives exchange Deribit, told Cointelegraph:
“As Blackrock’s Fink said, ‘cryptocurrency is here to stay’ and bitcoin ‘is a sustainable mechanism that could replace gold.’ Statements like these have been the driving force behind recent performance, but as a platform we’ve seen new entrants join all year.
Strijers confirmed that as a platform, Deribit sees institutional investors entering the crypto space using trading instruments they are familiar with, such as spot and options, which has led to considerable growth in the market. ‘open interest throughout 2020.
The Chicago Mercantile Exchange is also a leading marketplace for options and futures trading, especially for institutional investors, as the CME is the world’s largest derivatives trading exchange on all classes of. ‘assets, making it a familiar market for institutions. It even recently overtook OKEx as the largest Bitcoin futures market. A spokesperson for CME told Cointelegraph: “November was the best month for the average daily volume (ADV) of Bitcoin futures contracts in 2020, and the second best month since its launch.”
Another indicator of institutional investing is the growth in the number of large open interest holders, or LOIH, of CME’s Bitcoin futures contracts. A LOIH is an investor who holds at least 25 Bitcoin futures contracts, each contract consisting of 5 BTC, which makes the LOIH threshold equivalent to 125 BTC – over $ 3.5 million. The CME spokesperson clarified:
“We have an average of 103 large open interest holders in the month of November, which is a 130% year-over-year increase, and reached a record 110 large open interest holders in November. 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. Much like their role in traditional financial markets, derivatives offer investors a very liquid and efficient way to hedge their positions and mitigate the risks associated with the volatility of crypto assets.
Other macroeconomic factors are also driving demand
Several macroeconomic factors are also driving the surge in demand in the crypto derivatives market. Due to the COVID-19 pandemic, several major economies, including the United States, United Kingdom and India, have been under stress due to limited working conditions and rising unemployment.
This has prompted several governments to roll out stimulus packages and 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 this year’s pandemic and the responses of many governments with massive stimulus packages and QE, many more traditional investors are looking to Bitcoin as a potential inflation hedge. Cryptocurrency is finally becoming a legitimized asset class and that will only mean a greater increase in demand. “
There is growing interest from the mining community and other revenue-generating companies in Bitcoin looking to hedge their future profits so that they can pay their operating expenses in fiat currencies.
In addition to institutional demand, there is a significant increase in retail activity, confirmed Strijers: “Single accounts active on a monthly basis in our options segment continue to increase. The reasons are the general attention of (social) media to the potential of the options. The CME spokesperson also said:
“In terms of new account growth, as of Q4 2020 to date a total of 848 accounts have been added, the most we’ve seen in each quarter. In November alone, 458 accounts were added. In 2020 to date, 8,560 CME Bitcoin futures contracts (equivalent to approximately 42,800 bitcoins) have traded on average each day. “
Ether derivatives develop thanks to DeFi and Eth2
Besides Bitcoin futures and options, Ether derivatives also rose significantly in 2020. In fact, the CME even announced that it will be launching Ether futures in February 2021, which in itself is a sign. of the maturity that Ether has reached in his life. cycle.
Previously, the crypto derivatives market was monopolized by products using Bitcoin as an underlying asset, but in 2020 Ether derivatives have grown to take a significant piece of the pie. Strijers clarified:
“Looking at the value of turnover in USD, we see that on Deribit, BTC derivatives contributed the majority of the volume, but the percentage fell from ~ 91% in January to ~ 87% in November. During the peaks of the DeFi summer, the percentage of BTC fell in the mid-1970s due to the increase in ETH activity and dynamics. “
The reason that Bitcoin derivatives represent a larger portion of the crypto derivatives market is because BTC is now well understood by the market and has received validation from major institutions, governing bodies, and several prominent traditional investors. However, in 2020, several factors also influenced the demand for Ether derivatives. Hao believes that “DeFi’s huge growth in 2020 and the launch of the ETH 2.0 Beacon Chain has definitely rejected interest in Ether and, therefore, Ether derivatives.”
However, even if Ether continues its bull run alongside Bitcoin and will likely see a further increase in demand for derivatives, it is highly unlikely that BTC will be overtaken any time soon. Hao added, “We will see growing demand for these two products, however, BTC, as the number one cryptocurrency, will likely experience the strongest growth as more institutional dollars flood the space.
2021 should be a crucial year
Starting with the launch of CME’s Ether futures product in February, this year is expected to be an even bigger year for crypto derivatives if the bull run continues. The market also recently experienced the largest option expiration to date, with nearly $ 2.3 billion in BTC derivatives expiring over Christmas.
With traditional markets, the derivatives market is several times bigger than the spot market, but it’s always the opposite with crypto markets. So it looks like the crypto derivatives market is still in its infancy and is set to grow exponentially as the industry grows. 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 are seeing more market makers listing our instruments, increasing our ability to initiate more sets and expirations, tightening spreads, which acts as a fulcrum for increased interest as execution becomes cheaper and more efficient.
Besides Bitcoin and Ether derivatives, there are altcoin derivatives that are offered on various exchanges, most often perpetual swaps, but also options and futures. Hao further developed these products and their demand prospects:
“Many other altcoins are already available for trading derivative products, 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 gain the confidence of institutional traders.
Even if institutional investors are not yet turning to derivatives of these altcoins, this is set to change with the continued growth of decentralized financial markets and the use cases they can offer. Ultimately, this may translate into an increase in demand for more crypto derivatives in the near future.
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