Options Futures are a popular trading technique that allow traders to bet on the direction of prices within a set time frame by placing a small amount of trade value. This can be a profitable strategy, however, there is also the risk of incurring large losses if the market moves against them.
The crypto derivatives market is still in its early stages compared to traditional financial markets, and the infrastructure needed to support it is relatively underdeveloped.
Nevertheless, 2023 is expected to be significant for the growth and maturity of crypto derivatives, due to the expansion of related infrastructure, such as DeFi applications, and the increasing number of professional brokers entering the space.
Growing Volume of Crypto Derivatives in 2023
The volume of crypto derivatives is projected to continue increasing in 2023 due to a couple of factors. Firstly, the infrastructure is being improved and expanded, as well as more transparent and professional brokers entering the market. This will result in more institutional players joining.
It is a great opportunity to learn about the market and why traditional financial institutions opt for derivatives over traditional spot markets. One of the main reasons is the ability to leverage capital and the fact that US derivative contracts are considered long-term capital gains, with associated tax benefits.
As more institutions join the market, relative volatility is expected to decrease, making derivatives trading a more attractive use of capital. Furthermore, derivatives could become an essential tool to hedge against volatility in the short-term.
The Crypto Derivatives Industry is Still in its Infancy
2022 and 2023 will be unique years for crypto derivatives. There will likely be an increase in both central and decentralized options infrastructure, as well as the introduction of new crypto primitives such as structured vaults and everlasting options.
The cryptocurrency industry is also pushing into regulated markets in an effort to gain more customers and compete with established financial companies like brokerage firms, which allow stock trading and other financial assets.
Although most derivatives deals are done on platforms that are not regulated and found outside the US, the Chicago Mercantile Exchange (CME) is the most commonly traded currency in the world. According to CoinGlass data, in November it accounted for 10.7% of open interest in Bitcoin (BTC) and Ether (ETH) futures.
Large Companies Purchasing Small Licensed Derivatives Trades
It is becoming increasingly difficult to tell where the retail and institutional markets start and end. Retail-oriented companies that have bought cryptocurrency exchanges are managed by some of the biggest and most experienced firms on Wall Street.
In January 2021, Coinbase acquired FairX, a small US-based futures trading platform. The deal was created to make it easier and more convenient for traders to access the derivatives markets. The startup provides a retail-focused futures trading platform called The Small Exchange, which requires less money upfront.
Citadel Securities, Jump Trading, and Interactive Brokers have also supported the company.
The Growth of Decentralized Derivatives Markets
Decentralized futures, particularly Perpetual Protocol, make up the majority of the derivatives volume. Led by Perpetual Protocol, dYdX reports that the daily volume of decentralized perpetuals is $3 billion per day.
Although growth has been strong, decentralized perpetual volume is still just 5% of overall crypto derivatives volume. This segment is expected to grow significantly in the next two years.
The value of the platforms supporting them will also keep growing as more projects and protocols are built on decentralized perpetual trade protocols. Market participants will also be thrilled to see more innovative crypto-native products like everlasting options and decentralized options.
Traditional Investors Can Be Attracted to Derivatives
Institutional investors are more likely to be attracted to derivatives instruments as they offer returns similar to fixed income. Traders can execute strategies such as bull call spreads or covered calls, as well as combine call-and-put options to set a risk limit and avoid the possibility of losing option trades.
Fidelity Digital Assets now offers its institutional clients the option to borrow cryptocurrency as collateral, which simplifies the process for large companies to add capital. These services can help protect assets.
In 2023, cryptocurrencies are expected to become easier to use as collateral in everyday business, which will allow companies to take on more risk with cryptocurrency derivatives.
Institutional and retail traders both played a pivotal role in the development of the 2020-2021 cryptocurrency bull markets. For many investors, borrowing money to use derivatives is the best way of increasing their bets on different positions.
Conclusion
Derivatives are readily available for stocks, currencies, commodities, but their popularity for cryptocurrencies has been rising since 2017. In 2023, crypto derivatives will be more accessible, with more products and protocols available, and traditional investors could become interested in them.
This article is not intended to
