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Year of the derivatives: Crypto futures see explosive growth

The crypto market witnessed record quarterly growth in derivatives trading throughout 2020, and there’s no sign the locomotive is running out of fuel. In fact, the derivatives market now constitutes roughly half of the total crypto market, with many exchanges seeing higher trading volumes in derivatives markets than spot.

Whether centralized or decentralized, derivatives platforms are proving to be pivotal pillars of the cryptosphere, serving retail and institutional traders keen to speculate on the future price of bitcoin and altcoins. They also inform spot prices and asset price discovery while contributing significant liquidity. Hong Kong-based exchange FTX is one of the market’s runaway success stories, with last year’s volumes eclipsing $250 billion and the company achieving a valuation of $3.5 billion.

The major players in crypto derivatives

To be sure, the success of FTX is a result of many things, not least the big brain behind operations – MIT graduate Sam Bankman-Fried, the second richest man in crypto according to Hurun Report’s 2020 Global Rich List (Coinbase’s Brian Armstrong is #1). But it certainly speaks to the rising interest in crypto derivatives, which allow traders to hedge their portfolio and protect against price and volatility risk. 

While leveraged trading has its own risks (many exchanges now routinely offer 100x leverage), the potential for rewards is enormous, providing of course you know what you’re doing.

According to CoinMarketCap, the four dominant derivatives exchanges handle upwards of $10 billion of daily derivatives volume, with Binance out in front with $40+ billion. Even the 11th busiest exchange facilitates over $1 billion in daily volume. 

Amazingly, monthly trading volumes for bitcoin futures more than doubled between December and January, surpassing $2 trillion – up from $993.8 billion from the month before. Despite this being an unprecedented all-time high, the figure was just shy of $2 trillion in February. It’s entirely possible that figures will stay above $1 trillion for every month of 2021.

Remember, those figures purely cover trading on bitcoin futures. Ethereum, the number two cryptocurrency by market cap, is also attracting huge interest. Since launching on February 9, the Chicago Mercantile Exchange’s (CME) ETH futures have reached $1 billion, while derivatives open interest across all products has surged. 

CME’s entry into the ETH futures market is notable, because its product is the first financially-settled ETH futures contract that is also regulated by the U.S. Having access to fiat-settled futures has long been high on the priority list for traditional traders, since it obviates the need to take custody of digital assets, something that entails insurance considerations. In another first, CloseCross – an Ethereum-based derivatives trading platform – has recently been granted a European Union MIFID license ahead of its market launch later this month.

Copy trading and intense competition

Competition between derivatives platforms has been intensifying ever since CME launched bitcoin futures trading four years ago. This can only be a good thing for traders, who get to weigh up what each platform has to offer in terms of supported markets and maker/taker fees. This fact has compelled derivatives exchanges to improve UX, offer better rates, and innovate in terms of features. 

Bingbon, for example, has rolled out a copy trading service, enabling users (known as ‘followers’ in copy trading) to mimic the trades of top-performing traders (‘copy traders’). The feature has become enormously popular, as it takes the stress out of futures trading while enabling users to earn a generous return. Followers can choose between Fixed Margin, which allows them to control the amount of margin on every trade, or Proportional Margin, wherein they set the margin on a per-unit basis for strategic copy trading.

Other exchanges, meanwhile, have expanded their offering to include derivatives on markets that couldn’t exist on spot: bitcoin hashrate futures, ETH gas price futures, defi and midcap indexes, Coinbase IPO futures, perpetual swaps and options, MOVE contracts – even futures on tokens that have yet to be launched. Matching engines have also improved across the board in recent years, as has interactive charting software and the availability of fiat on/off ramps. Binance currently offers the highest maximum leverage, at 125x.

What can we expect from the derivatives market in the year ahead? In short, more growth. Emerging defi protocols offering trustless trading will only increase inflows, with each platform looking to throw shade on its rivals. Rising mainstream adoption of cryptocurrencies, nourished by PayPal support, Tesla’s buy-in and a million other positive signals, is also likely to compel novice and seasoned traders to explore what the industry has to offer. 

About Author

Jake Simmons

Jake Simmons has been a crypto enthusiast since 2016, and since hearing about Bitcoin and blockchain technology, he's been involved with the subject every day. Beyond cryptocurrencies, Jake studied computer science and worked for 2 years for a startup in the blockchain sector. At CNF he is responsible for technical issues. His goal is to make the world aware of cryptocurrencies in a simple and understandable way.

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