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Growth of the crypto derivatives market

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Satoshi&Co Daily Crypto Newsletter

July 4 · Issue #206 · View online
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Check out past issues of the newsletter along with more interesting crypto content as well as our recently-launched podcast series with leading crypto industry participants at our newly-launched website www.satoshiand.co

Current State of the Crypto Derivatives Market
While spot trading in cryptocurrencies has been consistently increasing over the past few years, with daily traded volume exceeding $10 billion dollars, the derivatives market for cryptocurrencies is still fairly nascent. Most of the existing derivatives exchanges for cryptocurrencies are unregulated and operate out of jurisdictions where the regulations for crypto exchanges are in the gray zone. 
As we see from data on ratio of derivatives-to-spot volumes in various markets, crypto derivatives still has some distance to grow.
In the US, besides CME’s bitcoin futures contracts, a majority of the derivatives trading happens over the market with boutique crypto derivatives trading firms offering structured derivatives products such as reverse convertibles and variance swaps to entities that manage money for wealthy individuals and families. Relative to spot trading, in which retail investors account for a significant chunk of the trading volume, the highly specialized and complex nature of derivatives precludes retail investors from participating in the crypto derivatives market.  
Regulatory Landscape for Crypto derivatives
As cryptocurrencies still lack legal recognition in many jurisdictions, crypto derivatives market largely remains unregulated. However, due to the highly volatile nature of the crypto asset class, and the damaging consequences of leverage trading and several risks that derivatives expose investors to, regulators in some countries such as the UK are mulling over a ban of crypto derivatives trading.  
Types of Crypto derivative offerings available
Unlike traditional derivatives markets, where the multitude of derivatives products range from simple options and futures to highly complex CDS and CDOs, crypto derivatives market, in its current state, offers simple derivatives products such as futures and perpetuals with margin trading. The market for plain vanilla call/put options for cryptocurrencies is still growing. There is a huge demand for sophisticated financial market products, but the most common product available on exchanges are the basic perpetual swap - which is a rolling product that offers leverage, often up to a 100x, for market participants that want to take a long or short view on the price of the major cryptocurrencies, such as BTC, ETH, and XRP.
Leading Players in the Crypto derivatives Space
In addition to CME, which has seen a record trading volumes for its bitcoin futures product last month, BitMEX, Deribit, OkEx and BitFlyer are some of the leading providers of crypto derivative products (mostly futures). However, derivatives-focused crypto exchanges have been springing up in 2019 with both ErisX and LedgerX having received licenses to offer crypto derivative products to investors. Unsurprisingly, Binance has also entered the game ( they are the Facebook + Amazon + Google of Crypto currently but one sometimes gets the feeling that they are Icarus flying a tad too close to the sun). 
BitMEX is by far the leader. BitMEX launched early on, and was for the longest time the only game in derivatives town. Bitmex daily volumes for the BTC perpetual contracts described above touched 16 bn per day on some days this past week. To put things in perspective, Coinbase does around $250 m a day in daily volume and Binance does around $900 m a day.
The future for crypto derivative platforms
Like with spot exchanges, there is the problem of fake volumes on derivatives exchanges as well. Volumes at OkEx, Bitflyer etc are most likely predominantly ‘simulated’, and BitMEX volumes have sometimes been questioned. Additionally, most of these, especially BitMEX, have a reputation for being unregulated casinos, with no KYC/AML stipulations, and fairly opaque settlement practises. 
Impending FATF rules adopted by the G-20 on information disclosures required of exchanges to prevent money laundering and other nefarious use cases will go a long way towards cleaning up the exchange business. As the crypto industry matures, it is important that new venues prop up in a regulated manner, and cutting edge technology that is widely prevalent in traditional markets are also adopted. Lack of regulation is an especially galling structural impediment to institutional adoption. Derivatives are a key tool for risk management and is critical for crypto to grow into the mainstream as a traditional asset class. Regulation will allow large volumes of institutional capital to come in, and HFTs, algorithmic trading and dark pools to emerge. This will then provide a feedback loop, leading to a secular growth and eventual maturity in the overall crypto asset class.
Meanwhile in Crypto Wonderland....
“Korean Bank Cracking Down on Crypto Users”
Shinhan Bank, the second largest financial group in South Korea by assets, is redoubling its efforts to police accounts related to cryptocurrency exchanges, according to local press reports. The goal? To completely quash anonymous crypto transactions in the country. The bank is reportedly planning to increase the number of staff scrutinizing such accounts, as well as continuing to develop systems dealing with potential fraud and monitoring transactions. It also said that it would be working to develop artificial intelligence systems to help it spot suspicious activity.
“Maduro Orders Banks to Accept Crypto”
The president of Venezuela, Nicolas Maduro, has announced an order requiring Banco de Venezuela —the country’s biggest bank— to open desks for transactions in Petros in each of its near 790 agencies across the country. The announcement occurred during an event celebrating the tenth anniversary of the bank’s nationalization after the country purchased it from Santander Group in 2009. This strategy seems to be part of an aggressive plan to promote the use of cryptocurrencies throughout the country. Recently, President Nicolas Maduro announced the decision to distribute crypto wallets to one million young citizens. The Venezuelan government will also educate them in areas related to crypto adoption.
“Liquid To Hold Gram Token Auction”
Even before Gram is released to the public, Telegram Messenger’s cryptocurrency may have appreciated by 200% from last year, when it began one of history’s biggest ever initial coin offerings. Just ask one of the early investors. South Korea’s Gram Asia offered to sell the rights to the Grams it holds at $4 apiece in a sale beginning July 10, according to Japanese crypto-exchange Liquid. This compares with $1.33 paid by private investors in the second ICO round in March 2018. The price will be lowered to $3.50 per Gram if buyers use Liquid’s cryptocurrency QASH in the purchase, the exchange said in emailed statement Wednesday.
“UK Watchdog Mulling Over Banning Crypto Derivatives”
A British regulator proposed a ban on selling derivatives based on bitcoin and other digital currencies to individual investors, calling these products “unsuitable investments” for nonprofessionals. The Financial Conduct Authority said it would consult with the financial industry and consumers about the restrictions. The curbs would cover the sale or marketing of derivatives and exchange-traded notes linked to cryptocurrencies and other digital assets, and could start early next year.
Tweet of the Day
Jimmy Song (송재준)
Utility tokens degrade as economic rationality, choke point regulation and protocol ossification increase. Time destroys their value.

Bitcoin is decentralized ultrahard money. Ossification adds reliability and makes regulation difficult. Time increases its value.
5:22 PM - 4 Jul 2019
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