Derivatives markets for Bitcoin and Ether target the spot market


The crypto derivatives market is dominated by Bitcoin (BTC) and Ether (ETH), with the main platforms being Huobi, Chicago Mercantile Exchange, OKEx, Bybit, and Deribit. The CME has also thrown itself into the ETH market ring with the launch of its Ether futures on February 8, which reached a notional volume of $ 30 million on the first day.

Prior to this launch, there was a massive $ 1 billion option expiration on Feb. 5, prompting the bulls to target the $ 40,000 price range, based on underlying options data. But this expiration was overtaken by Elon Musk’s tweet in support of Bitcoin right after the expiration event; This effectively allowed Bitcoin to pass the $ 40,000 mark before entering new all-time highs due to Tesla’s purchase of $ 1.5 billion in BTC.

Luuk Strijers, commercial director of crypto derivatives exchange Deribit, told Cointelegraph: “The use and popularity of the options is growing, which can be seen in the open interest figures, the volumes and the number of clients that are trading, which are increasing.” In addition, he added: “The longer the expiration, the greater the probability of an impact on the underlying market.”

Discover the derivatives market

In traditional markets, derivatives play a prominent role in spot pricing and determining the price of an asset, but that’s largely because traditional spot markets are only a fraction of the size of the derivatives market. .

Meanwhile, in the cryptocurrency markets, spot markets are much larger than the size of derivatives markets. But with the increase in the size of the derivatives market, the relationship with the spot markets seems to be getting stronger.

One of these metrics that indicates whether the market is bullish or bearish relative to BTC is the delta tilt from 30% to 20%. Refers to the difference in premiums between neutral or bullish call options versus similar put options.

Jay Hao, CEO of crypto exchange OKEx, told Cointelegraph that the derivatives market’s growing influence over spot markets is a positive development, saying: “As the derivatives market grows in size and importance, this is a pattern we would expect to see. “

However, contrary to the patterns expected to emerge in the derivatives market relative to spot markets, the impact of prices is often unclear. Shane Ai, head of research and development for crypto derivatives products at Bybit – a cryptocurrency derivatives exchange – told Cointelegraph:

“The increases in Open Interest on futures should be compared with the increase in spot volumes. Contrary to popular belief, the dominance of swaps and futures over spot volumes has seen a significant decline since December last year. Although there are incentives to punish overlevered long positions when funding becomes extreme, they no longer have an influence on spot prices. “

Ben Caselin, head of research and strategy at AAX – a digital asset exchange – told Cointelegraph that the extent to which the spot price of BTC is affected by the derivatives market is exaggerated. However, he also pointed out the functionality of derivatives markets for spot markets, saying: “Derivatives help to create a more sophisticated infrastructure around Bitcoin as an asset. It attracts different investors who would not otherwise be willing to contract Bitcoin directly.”

Tesla investment will open the derivatives market

Institutional investors often turn to derivatives to hedge other risks associated with their portfolios. This could be said for the cryptocurrency markets as well, especially since institutional investors seem to be very interested in Ether now as well. A CoinShares report claims that of the $ 245 million of institutional inflow seen in the cryptocurrency market in the first week of February, $ 195 million (80%) was invested in Ether products until the launch of the futures contract of Ether from CME on Monday, February 8.

This suggests that institutional investors are starting to further diversify their exposure to cryptocurrencies by investing in cryptocurrencies other than Bitcoin. This perception is reinforced by the fact that Elon Musk has drawn a lot of positive attention to Bitcoin and even other smaller cryptocurrencies like Dogecoin (DOGE).

His vocal support for Bitcoin through Twitter, combined with his company Tesla’s purchase of $ 1.5 billion in Bitcoin and even the ability to accept Bitcoin payments for Tesla products, will only boost the market and get more institutional investors to follow. Hao also talked about how this will affect the derivatives markets:

“As we see more Fortune 500 companies following Tesla’s lead and more institutional money flowing into this space, we will see an increase in demand for derivatives as a tool to hedge volatility and employ a risk management strategy. more efficient to compensate for possible losses. “

Strijers pointed out how the price impact of such ads moves the derivatives market as well: “Events like this have an immediate impact on prices and therefore an effect on the prices of all derivative instruments (price and IV increase> 150%). We have seen that short-term (daily) options are they have moved more than 1,000% in a few minutes. “ Strijers also shed some light on the outlook that institutional investors have a greater need for derivative products than average retail investors:

“Institutional adoption such as MicroStrategy, Tesla, Grayscale, etc., paves the way for more institutional players, many of whom prefer to trade traditional instruments such as cash and options. We see this by the number of new corporate registrations, the traditional options market makers entering the cryptocurrency space and the increasing number of trades executed en bloc. “

Ether derivatives market is growing

The fact that the world’s largest derivatives exchange, CME, lists Ether futures on its platform, is a further impetus for institutional investors to enter a rapidly growing Ether market. Considering that the highly lucrative returns of 303% for Bitcoin during the year 2020 is one of the main reasons for the attention of the mainstream world, while ETH witnessed 469% gains in 2020, also becoming a coveted asset for institutional and retail investors alike.

In fact, Open interest in Ether futures recently hit an all-time high of $ 6.5 billion, and the underlying futures premium indicates that investors are not necessarily willing to liquidate the Ether they hold amid the current bull run.

Strijers delved into the growing interest in Ether, which has even overtaken Bitcoin right now: “The launch of ETH futures by CME is another indicator of institutional interest in ETH as an investible asset.” Furthermore, he added that on some days, Grayscale ETH Trust attracts more inflows than BTC, indicating that interest in ETH derivatives is increasing.

Ai goes one step further by suggesting that investors are more interested in Ethereum fundamentals than CME’s Ether futures launch: “Compared to BTC in 2017, ETH today has many more avenues for institutional coverage; the CME listing is actually a non-event. The ongoing EIP-1559 narrative and Grayscale acquisitions are much more instrumental in attracting institutions. “

Compared to Bitcoin, which is considered a decentralized haven of value, the Ethereum blockchain offers many use cases for various applications in the decentralized financial space. This opens up more opportunities for ETH to be used within the industry.

Additionally, due to increased attention to the possible inflationary impact of the COVID-19 stimulus packages, various assets, including commodities, are trading at record highs. The retailer rebellion seen in the GameStop fiasco is also helping more initiated retail investors to diversify through crypto assets, rather than solely targeting Bitcoin.

Hao highlighted the popularity of perpetual swaps among these investors: “Rather than waiting for the expiration and delivery of a contract, perpetual swaps save time by renewing contracts regularly. This would be an advantage for retail investors in terms of convenience.”

Futures trading is also becoming increasingly popular with retail investors as trading is done on margin. This is prompting increased activity on centralized exchanges, the rise of DeFi prediction and options markets, better educational resources than ever, and more hype and saucer proliferated by various social media platforms. These positive changes are making it easier for retail traders to diversify their trading strategies between assets, instruments and terms.

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