Riding the Volatility Wave With Digital Derivatives

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Global crises the size of Covid-19 have always shaken the global economy, but have also been observed to fuel fast-track innovation. The fintech sector has been no exception with multiple companies accelerating their innovation and development efforts to counter the effects of multiple dimensions, including inflation.

While the world GDP could shrink by 0.9% in 2020 due to Covid-19, two fundamental questions arise, both of which point to cryptocurrencies as an answer. One, how can ordinary people safeguard their financial savings from swings in the value of fiat currency, which is set to follow this economic conundrum? And second, what investment alternatives are there when most traditional markets are seeing sharp downturns paired with a highly unpredictable future? This article dives into how cryptocurrency derivatives have a huge potential for growth.

Derivatives could provide a reliable profit-making solution during times of crisis

When the market is predicted to continue on a downward path, inveterate traders will reorganize towards derivatives which generate profits every time they predict the trend correctly by trading futures. For the traditional financial market, the opinions on this matter are mixed. While Lexis Nexis provides a largely negative forecast for common derivatives, the Washington Post leans on the optimistic side after revealing outstanding revenue reports from leaders in the financial sector, presumably as a result of securities trading.

The story looks similar for cryptocurrency traders. Initial market reactions reflected overall fear of the repercussions of Covid-19, which resulted in an unprecedented 43% plunge in Bitcoin’s price in less than 24 hours. The market saw a reasonable correction shortly after that, but the event constitutes, nevertheless, a reminder of the vulnerability of the cryptocurrency market to exogenous events in a similar fashion to traditional markets. However, while the price of Bitcoin has nearly recovered to its pre-coronavirus value, the real impact comes from the performance of its derivatives. In Q1, 2020 Bitcoin futures contracts have accounted for 78% of futures volume.

How crypto derivatives are related to trends in the spot market

First, let us understand what cryptocurrency derivatives are. A contract signed by two or more parties to buy or sell a cryptocurrency asset for a fixed price in the future is a crypto derivative. The cost of the asset may change in the future, impacting the value of the contract.

At present, the crypto derivatives include futures, options, and tradable index. Futures are the most popular among investors since traders can leverage up to 50x. All the major cryptocurrency exchanges in the world have already stepped into the derivatives field, launching futures trading services.

The development of common derivatives is strongly connected to the spot market development, and if we compare the trends with the traditional market, cryptocurrency derivatives have a huge potential for growth. Monthly trading volume of cryptocurrency derivatives is around 400 billion USDT, which is much lower than traditional financial derivatives valued at over 5,000 billion USD.

Source: Gate.io Crypto Derivatives Analysis Research Report

The graph below shows that current cryptocurrency derivatives take up from 20% to 30% of the total cryptocurrency trading volume. However, during volatility, it can capture up to 70% of the overall volume.

Source: Gate.io Crypto Derivatives Analysis Research Report

The crypto derivatives market is expected to grow significantly during this time as a result of inflation and distrust affecting the traditional market.

Nearly 60% of the cryptocurrency trading volume consists of derivatives trading, and yet most cryptocurrency exchanges are only beginning to tap onto this market. The potential that the cryptocurrency derivatives market holds has been demonstrated by a 14.93% growth in the fourth quarter of 2019 and a further 41.10% in the first quarter of 2020.

Although price fluctuations in cryptocurrencies are generally subject to technological developments and legislative issues, a market simulation performed in a recent research report suggests that the derivatives market could expect to see even more spectacular growth, climbing up to $1 trillion daily trading volume by 2023.

Source: Gate.io Crypto Derivatives Analysis Research Report

Friendly crypto regulations by governments have also contributed to the growth of crypto derivatives. For instance, the US and European regulatory bodies are actively working on regulating the crypto derivatives market.

Despite being fairly nascent, the latest figures (314% spike in trading volume in Q2, 2020) show that crypto derivatives are having a moment amid Covid-19 lockdowns.


Marie Tatibouet is the CMO at Gate.io. She is currently based in Paris and has lived and worked in America, Europe and Asia. Before joining Gate Technology, she was the CEO at a digital marketing agency in Hong Kong, working with clients in the blockchain technology sector. As a blockchain influencer and a charismatic leader in the crypto and blockchain industry, Marie is known for spreading the importance of blockchain technology to the masses, simplifying its technicalities for the everyday user, and mapping out security and transparency features of blockchain and crypto infrastructure.

 

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