2020 has been the most important year so far for the crypto derivatives market. Both Bitcoin (BTC) and Ether (ETH) derivatives have grown steadily over the course of the year. Their futures and options products are available on exchanges such as the Chicago Mercantile Exchange, OKEx, Deribit and Binance.
On December 31, open interest in Bitcoin options hit an all-time high of $ 6.8 billion. This is three times the OI observed 100 days earlier. This shows how fast the crypto derivatives market is growing in this bull run.
The Bull Run has seen many new investors enter the market amid the uncertainty plaguing traditional financial markets due to the ongoing COVID-19 pandemic. These investors try to hedge their bets against the market by using derivatives of underlying assets like Bitcoin and Ether.
Institutional investors bring the decisive change
While there are several factors driving the growth of crypto derivatives, it is safe to say that this is largely down to the interest of institutional investors, as derivatives are complex products that are difficult to understand for the average retail investor.
In 2020, various companies such as MassMutual and MicroStrategy showed great interest by buying Bitcoin either for their reserves or as a treasury investment. Luuk Strijers, commercial director of the crypto derivatives exchange Deribit, told Cointelegraph:
“As Blackrock’s Fink put it, cryptocurrency is here to stay and Bitcoin is a permanent mechanism that could replace gold.” Statements like this were the driver of recent performance, but as a platform, we’ve seen new entrants year-round. ”
Strijers confirmed that Deribit sees institutional investors as a platform entering the crypto space with trading instruments like spot and options, which have resulted in a huge surge in open interest over the course of 2020.
The Chicago Mercantile Exchange is also an important marketplace for trading options and futures, especially for institutional investors, as the CME is the world’s largest trading exchange for derivatives in various asset classes and is therefore a well-known marketplace for institutions. It even recently overtook OKEx as the largest Bitcoin futures market. A CME spokesperson told Cointelegraph, “November was the best month for average daily volume (ADV) of bitcoin futures 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 (LOIHs) of CME’s Bitcoin futures contracts. A LOIH is an investor who holds at least 25 Bitcoin futures contracts, with each contract consisting of 5 BTC, so the LOIH threshold is equal to 125 BTC – over $ 3.5 million. The CME spokesperson further explained:
“We had an average of 103 large open interest holders in November, an increase of 130% over the previous year, and we had a record 110 large open interest holders in December. The growth of large open interest holders can be viewed as indicative 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 hedge their positions and mitigate the risks associated with the volatility of crypto assets.
Other macroeconomic factors are also driving demand
There are several macroeconomic factors that are also driving demand for crypto derivatives. As a result of the COVID-19 pandemic, several large economies, including the United States, the United Kingdom and India, have been stressed due to limited working conditions and rising unemployment.
This has led several governments to put in place stimulus packages and quantitative easing measures to reduce the impact on the base economy. Jay Hao, CEO of OKEx – a crypto and derivatives exchange – told Cointelegraph:
“With the pandemic this year and the reactions of many governments to it with massive stimulus packages and QE, many more traditional investors are moving into Bitcoin as a potential inflation hedge. Cryptocurrency is finally becoming a legitimized asset class, which will only lead to a bigger surge in demand. “
There is growing interest from the mining community and other businesses that generate revenue in Bitcoin to secure their future profits and pay their operating costs in fiat currencies.
In addition to institutional demand, there has also been a significant increase in retail activities, Strijers confirmed: “The monthly accounts that are active monthly in our options segment continue to increase. Reasons are the general (social) attention of the media to the potential of options. “The CME spokesman also stated:
“In terms of new account growth, a total of 848 accounts were added in the fourth quarter of 2020, the most we saw in a quarter. 458 accounts were added in November alone. By 2020, an average of 8,560 CME Bitcoin futures contracts (equivalent to around 42,800 Bitcoin) were traded daily. “
Ether derivatives grow due to DeFi and Eth2
Aside from Bitcoin futures and options, ether derivatives also grew tremendously in 2020. In fact, the CME has even announced it will launch Ether Futures in February 2021, which in itself is a sign of the maturity Ether has reached in its cycle.
The market for crypto derivatives used to be monopolized by products with Bitcoin as an underlying, but in 2020 ether derivatives were a significant part of the pie. Strijers continued:
“If we look at the USD value of sales, we see that the BTC derivatives at Deribit made up the majority of the volume. However, the percentage has dropped from ~ 91% in January to ~ 87% in November. During the peaks of DeFi summer, the BTC percentage dropped to the mid-1970s due to the increased activity and dynamism of ETH. “
The reason Bitcoin derivatives make up a larger portion of the crypto derivatives market is because BTC is now well understood by the market and has been validated by large institutions, governing bodies and several prominent traditional investors. However, in 2020 there were several factors that also influenced the demand for ether derivatives. Hao believes that “DeFi’s tremendous growth in 2020 and the launch of the ETH 2.0 beacon chain have definitely sparked more interest in ethers and thus in ether derivatives.”
Although ether continues its bull run alongside Bitcoin and the demand for derivatives is likely to continue to rise, it is highly unlikely that BTC will be overtaken anytime soon. Hao continued, “We will see increasing demand for both of these products. However, BTC as the number one cryptocurrency will likely see the strongest growth as more institutional dollars flood the room.”
2021 will be a crucial year
Starting with the launch of CME’s Ether Futures product in February, this year will be an even bigger year for crypto derivatives if the bull run continues. The market also recently saw its largest expiration date for options: nearly $ 2.3 billion worth of BTC derivatives expire this Christmas.
In traditional markets, the derivatives market is many times larger than the spot market, but in crypto markets it is still the other way around. So it seems that the crypto derivatives market is still in its infancy and will grow exponentially as the industry gets bigger. As volume increases, the markets tend to become more efficient and provide better pricing for the underlying asset, as Strijers added:
“Because of the overall increased interest in the market […] We see more market makers citing our instruments, improving our ability to get more series and expiration times to market, and tightening spreads, which acts as the fulcrum of further interest as execution becomes cheaper and more efficient. “
In addition to bitcoin and ether derivatives, there are altcoin derivatives that are offered on various exchanges, the most popular perpetual swaps, but also options and futures. Hao went further into these products and their demand prospects:
“Many other altcoins are already being offered for trading in derivatives, especially in perpetual swaps, but also in futures. […] The demand for this is largely driven by retailers as some of these assets have not yet gained the trust of institutional traders. “
Even if institutional investors haven’t flocked to the derivatives of these altcoins yet, this will change as the decentralized financial markets continue to grow and the use cases they offer. Ultimately, this may lead to a surge in demand for more crypto derivatives in the near future.