This article mainly introduces the derivatives of the cryptocurrency market and combs its development status. Included in this, leveraged trading provides gradually been changed by some other derivatives; perpetual agreements have rapidly progressed into the current popular derivatives; option agreements are still in their infancy due to liquidity reasons; leveraged tokens continue to innovate but investing platforms are limited.
In the foreseeable future, cryptocurrency derivatives exchanges have to solve and overcome many technical difficulties and user fund security issues. Regulatory plans need to be launched as soon as possible to standardize derivatives to protect user rights. At present, the cryptocurrency derivatives market continues to be in the early stage of advancement, but there’s huge space for future advancement.
Since the birth of Bitcoin, the complete cryptocurrency market has undergone more than a decade of evolution and development. Generally speaking, cryptocurrency, as a new type of resource, has a higher volatility than different products in the traditional financial sector (such as securities, commodities, forex, etc.), and it is accompanied by extremely high risks. Using the gradual improvement and maturity of the cryptocurrency spot market, customers’ need for cryptocurrency dealings is no longer limited to simple spot transactions, and major cryptocurrency exchanges have begun to steadily launch different derivatives products.
The following will primarily introduce the problem of traditional financial derivatives to elucidate the introduction, function and role of derivatives in the cryptocurrency market, and comb the current advancement status of derivatives in the cryptocurrency market, as well as the future advancement of derivatives in the cryptocurrency market Overview of trends.
Traditional economic derivatives Financial derivatives are a collective term for a particular category of economic instruments bought and distributed. The value of this kind of derivative product depends on modifications in the worthiness of its root economic assets. For example, assets _ (commodities, stocks or bonds) , interest rates, exchange rates or different indexes (share index, consumer price index, and climate catalog) _ etc. The performance of these elements will determine the speed of come back and period of return of the derivative. The merchandise form is indicated as a agreement signed between your two parties _ (purchaser and vendor) _ and executed in accordance with the agreement requirements within a specified time.
- Forward agreements and futures contracts
Forwards contracts and futures contracts are both transaction forms where the 2 parties consent to buy or market assets of a specific quantity and quality at a specific time and at a specific price in the foreseeable future. The futures agreement is a standardized agreement formulated with the futures exchange, which has unified regulations around the expiry date of the agreement and the sort, quantity and quality of the assets purchased and sold. A forward agreement is a agreement signed by the customer and owner in line with the unique needs of the customer and owner, and is an over-the-counter transaction. Thus, the liquidity of futures investing is high, as well as the liquidity of ahead trading is reduced.
Contract transactions in the cryptocurrency market evolved from these two contracts. Because of the particularity of assets such as cryptocurrencies, cryptocurrency exchanges have innovated traditional agreement products and derived unique cryptocurrency markets. The following will focus on the perpetual agreement.
- Swap contract
A swap agreement is a agreement signed by both parties to exchange particular assets at a certain period in the foreseeable future. Even more specifically, a swap agreement is a agreement between the parties to exchange cash flows that they believe to possess equal economic worth within a particular period in the foreseeable future.
Swap contracts are usually mainly utilized for forex transactions between banking institutions and businesses to hedge or arbitrage between import and export commodities, so that they are not ideal for the cryptocurrency market.
- Option contract
An option agreement is a transaction of buying and selling rights. Option agreements stipulate the proper to get or sell a specific type and level of indigenous assets at a specific time and at a specific price. Based on the desires of option customers, options could be divided into contact options and put options. Option agreements provide investors using a broader selection of investment options, and adjust to the requirements of investors for more different investment decision motives and passions. Generally speaking, they are used being a hedging solution to reduce risks for investors.
At present, major exchanges in the cryptocurrency market have gradually introduced option contracts, and their investing logic is nearly the same as option contracts in the traditional economic industry.
The assets in the traditional financial market that are the subject of derivatives transactions are relatively diversified, such as stocks, interest rates, exchange rates, commodities, and indices. In the cryptocurrency market, token prices are usually mainly utilized as asset focuses on, and specific exchanges will innovate derivatives items, including some sector indexes, volatility indexes, etc. With the growth of the cryptocurrency market, the subject issue has a tendency to gradually increase.
Derivatives investing venues Derivatives investing venues are usually mainly split into 2 types, on-exchange investing and over-the-counter investing. Floor investing is also known as exchange investing, which refers to the way that all supply and requirement parties concentrate on the exchange for bidding dealings. In this investing method, the exchange collects margin from investing participants, and is particularly in charge of clearing and assumes the responsibility of performance promise. The centralized investing of all traders increases liquidity. Futures agreements plus some standardized option contracts participate in this sort of investing. Derivatives investing in the cryptocurrency market is mainly in this manner. Exchanges can ensure liquidity and offer users with hassle-free and fast investing needs.
Over-the-counter trading is also called over-the-counter investing, which refers to a trading method where both parties towards the transaction directly become counterparties. This transaction method can design different products based on the different needs of every participant, which can meet the different transaction needs of customers and each agreement is exclusive. The clearing action is carried out by both parties in charge of each other, which takes a higher level of user credit.
Derivatives are a complex financial tool that may bring customers different investment methods and reasons. The mix of derivatives and cryptocurrencies increases the threshold for customers to use. For inexperienced lay investors, derivatives could be more hard to manage and operate.
Launch to Cryptocurrency Derivatives At present, the popular derivatives in the cryptocurrency market include: leveraged investing, futures contracts, option agreements and leveraged tokens. Included in this, some cryptocurrency exchanges usually do not classify leveraged investing and leveraged tokens as one of the derivatives, but these two investing methods which are different from spot transactions do provide diversified operations to users and can achieve the derivatives market. Achievable effect. Thus, this article classifies it as one of the derivatives.
Leveraged trading Leveraged trading is a way of using funds supplied by a third party for asset trading. Compared with regular spot dealings, leveraged transactions can allow users to obtain more funds, amplify the outcomes of dealings, and enable customers to obtain better profits in profitable transactions.
In traditional economic markets, leveraged trading is normally called margin trading, as well as the borrowed funds are usually provided by stock options brokers. However, in the cryptocurrency market, borrowed funds are often provided by some other users around the exchange. Fund providers receive interest by putting assets in exchanges, customers who borrow assets through leverage spend curiosity on leverage, and exchanges become intermediaries to allocate assets and obtain dealing with fees from their website.
Leveraged trading can be used to open up long and short trades. Longs can borrow stablecoins to get cryptocurrencies, reflecting the user’s objectives for asset price increases; while pants borrow cryptocurrencies to instantly sell and buy back the related currency after the market drops, reflecting the contrary of longs. When working with leveraged investing to open up an extended or short placement, the trader’s assets will serve as collateral for your borrowed funds.
At present, the leverage multiples supplied by mainstream exchanges are 2-10 instances. The so-called leverage refers to the proportion of borrowed funds to margin. For example, to open up a leverage proportion of 5 instances for a transaction of 50,000 US dollars, users have to pledge 10,000 US dollars of margin. When the user’s placement opening direction is definitely opposite to the market trend and the market fluctuates drastically, and the full total assets of the user’s margin account are lower than the least margin requirement for leveraged investing, the exchange will pressure the sale of the user’s mortgaged assets to close the positioning.
The advantage of leveraged trading would be to open leveraged trading in several currencies through less investment costs, thereby getting higher returns to investors. Compared with spot trading, which can only purchase and do lengthy, leveraged trading provides investors with short-selling possibilities and can make profits when the market is down. However when the user makes a wrong view available on the market direction, leveraged trading will also provide serious deficits to an individual. Highly leveraged borrowing also means that little fluctuations in market prices may also make customers’ margins all lost.
Because of the risk of liquidation in leveraged investing, individual exchanges provide customers with the functions of full placement leverage and individual position leverage. Cross position leverage is a leveraged transaction that facilitates all investing pairs in the account, and the assets in the account are mutually guaranteed and shared. As soon as liquidation takes place, all assets under the account will undoubtedly be liquidated. Margin leverage implies that each investing set in each account has an impartial position, as well as the risks of every margin account usually do not affect each other. As soon as a liquidation takes place, you won’t affect all of those other account.
Generally, the warehouse-by-warehouse leverage function includes a stronger knowing of risk control for users’ overall positions, and can isolate the risks of different assets from each other, but users have to always focus on the margin conditions of different loan assets. The whole position leverage functionality is definitely conducive to the chance control of a single asset. Compared with each placement, the centralized discussing of margin can better buffer the liquidation of a single currency, but the extreme market situation of a certain asset could cause all The placements are closed.
Futures Agreements Futures agreements, being an earlier derivative product launched in the cryptocurrency market, are currently the derivatives with the best trading volume. There are two types of futures agreements in the cryptocurrency market: delivery agreements and perpetual agreements.
- Introduction to shipping contract
The delivery contract is an encrypted asset derivative product. Users can determine the increase and fall, choose to purchase long or market short contracts to get the gains through the rise/fall of digital resource prices. The shipping contracts of popular cryptocurrency exchanges generally utilize the differential shipping model. When the agreement expires, the exchange will near all open agreement orders. Just some exchanges such as Bakkt support physical shipping of cryptocurrency agreements.
At present, the delivery period of delivery contracts in the cryptocurrency market is mostly split into “present week, in a few days, and quarter”, and a certain several of leverage could be added. At present, mainstream exchanges assistance leverage of up to 125 instances. In market with volatile market, the chance of liquidation is higher.
- Launch to Perpetual Contract
Perpetual contract is an revolutionary derivative, that is similar to delivery contract. It’s that the perpetual agreement does not have a shipping date and customers can take it forever.
In traditional economic futures contracts, the parties mixed up in contract often have to hold a contract subject matter _ (mainly commodities, such as wheat, precious metal, copper, etc.) _, and holding the subject issue will increase the agreement in practice The expense of holding, producing a larger price gap between your agreement market and the spot market. In order to ensure the long-term convergence between your perpetual agreement price and the spot price, the exchange basically uses the funding rate method.
Funding rate refers to the settlement of funds between all longs and shorts in the perpetual contract market, that is settled every 8 hours. The funding rate determines the payer and recipient; if the rate is positive, the long will pay the funds towards the short; if it is negative, the short pays the funds to the long. You can consider this as a fee for the investor to carry a contract placement, or a refund. This system can balance the requirements of customers and retailers for perpetual agreements, so that the price of the perpetual agreement is basically consistent with the price of the underlying resource.
Virtually all mainstream cryptocurrency exchanges have supported perpetual contracts, with leverage around 125 times. Perpetual agreements are also typically the most popular derivatives in the market today.
- The difference between delivery agreement and perpetual contract
- The operation of the perpetual agreement is simple, you don’t need to consider the steps of delivery and exchange of positions, and can provide almost the same experience as the spot. For investors, the professional investment decision threshold is reduced. If the shipping agreement is automatically shipped by the system when it expires, a shipping fee must be paid. Compared with a perpetual agreement, it’s important to always focus on the shipping time.
- There is no shipping period for perpetual agreements, while shipping contracts have specific shipping times such as “current week, in a few days, quarter”. Investors can take perpetual contracts for a long period to obtain higher investment income, nonetheless it should be noted that you will see account rate settlement every eight hours. When the holding contract may be the account payer, the assets will cause a slight loss. Because of the rules of the account rate, large agreement traders generally near their positions prior to the account rate settlement time to prevent account wear, and more expert quantitative investors will use the long-short proportion and market problems to open placements to become the account rate The beneficiary.
- The price tag on the perpetual contract and the spot selling price remain relatively high, while the delivery contract price deviates greatly. Because of the financing rate system of perpetual agreements, the contract mark price is always close to the spot price. The further the shipping contract is through the shipping time, the bigger the deviation between its price and the spot price. When the shipping time techniques, the volatility is frequently greater because of the raise in the volume of closed placements, which is prone to “pin” trend_ (pin refers to a certain encryption The agreement price of the currency quickly increased or dropped at a certain time due to market manipulation and other reasons, and quickly came back to the standard price. Although the price has not transformed, a large number of positions have already been liquidated.)_.
- Forward agreement and change contract
In the cryptocurrency market, forward contracts are also called stable currency contracts, designed to use stable currency _ (USDT) _ to assist as the margin in the contract. Reverse contracts are also called currency-based agreements, designed to use currencies as the agreement margin for related trading pairs.
Derivatives in the traditional financial market are generally forward contracts which are settled by cash, while reverse agreements are innovations in the cryptocurrency market. The use of cryptocurrencies (BTC, ETH, etc.)_ becomes the guarantee for derivatives opening , Which greatly increases the requirement for cryptocurrency in the secondary market and promotes market liquidity.
- Solution to wear warehouse
Shortage refers to the fact that the user’s placement can’t be liquidated due to liquidity after the user’s agreement is liquidated, that’s, there is absolutely no counterparty in the investing market to match the order. Generally speaking, in cases like this, the exchange will take over the user’s remaining positions, which may cause the exchange to receive deficits. Popular exchanges _ (such as Binance, Huobi, OKEx, etc.) _ will setup danger guarantee funds. The risk guarantee funds are designed to replace losses caused when the user agreement asset margin is leaner than 0, and non-bankrupt liquidation customers pay extra Fees will undoubtedly be injected into the danger protection fund. The primary purpose of the risk safety fund would be to reduce the likelihood that users can’t be liquidated.
When the risk guarantee fund cannot take over the positions of cabin users, you can find presently two mainstream solutions in cryptocurrency exchanges.
- Apportionment through warehouse. In the settlement of revenue and loss around the shipping day, the exchange will aggregate and count number the increased loss of the liquidation caused by the liquidation purchases of all agreements, and allocate it in accordance with all the earnings of all profitable users.
- Automatically reduce placements. The exchange will close the positioning in accordance with user priority. The priority rank is calculated in line with the user’s revenue and leverage. Generally, the more revenue, an individual with the bigger leverage will undoubtedly be liquidated initial. The aforementioned two schemes obtain the system’s breakeven by decreasing the revenue part of the profitable side of the agreement. The growing allocation system will allocate all profitable users, as well as the automatic lightening is targeted at the most profitable users.
Cryptocurrency exchanges generally checklist multiple delivery agreements with different shipping times to meet up the needs of most users. This can also divert user funds and result in individual delivery agreements to have bad liquidity. The liquidity of perpetual agreements is better as well as the purchase depth is nearly near that of spot, so the trend of short placements mostly takes place in delivery agreements.
Option Agreements Currently, you can find two main types of option contracts in the cryptocurrency market. One may be the T-quoted option contract in line with the Deribit exchange, and another is the revolutionary option contract in line with the cryptocurrency market released by Binance.
- T-quote options
The T-quoted option contract in the cryptocurrency market is almost the same as the choice contract in the traditional financial market. All of them are European-style options and can only be exercised around the expiry date. The exchange acts as a securities agent and provides customers using a T-type quotation desk, which contains transaction information like the subject matter of an option contract, expiration date, exercise price, and buying and selling prices. Users can become option customers or option retailers.
_ Figure 1: Deribit option T-type quotation desk_
- Simple edition of new options
The second kind of option product may be the simple version of the brand new option _ (also known as short-term option) _ released by exchanges such as Binance and Gate.io. Compared with the complex T-type quotation desk of traditional choices, this sort of option product simplifies the investing process to improve the trading experience. Users only need to choose the expiration period of the choice and the purchase quantity to get an option. The exercise price when putting an order is definitely supplied by the exchange in real time. Based on the product characteristics of different exchanges, it can be split into two forms: European choices and American choices. Compared with traditional choices, its expiration period range is definitely shorter, ranging from 5 a few minutes to 1 1 day. An individual can only perform an option agreement game with the exchange as an option buyer. This sort of simple version of the brand new option has the right after characteristics:
- High liquidity. Generally speaking, standard option agreements have multiple choices for expiration and workout prices, and also have two options for customers and retailers. A diversified product structure will also diversify the liquidity of every option contract. The seller of the simple version of the brand new option is an exchange, which can provide liquidity at any time, so users need not worry about the problem that there surely is no counterparty due to lack of liquidity.
- The operation is simple and easy to use, which is even more user-friendly for beginner users. Option is essentially a complex derivative. In-depth understanding of option agreements requires the grasp of the more technical nonlinear relationship between your five Greek characters, and the training cost and threshold are usually high. The easy version of the brand new option has become a very easy derivative device after being packed with the exchange, which may be understood as the user’s expected guess of the short-term price of cryptocurrency assets.
- Options possess a shorter expiration date. The expiration date of the simple version of the brand new option ranges from five minutes to 1 1 day, that is far from the month or even quarter of a normal option contract. The primary customers of short-term choices tend to be more speculators who make short-term guesses increasing or fall of the root assets, and betting means more importantly.
- The intrinsic worth isn’t transparent. The short-term choices packaged with the exchange will not offer users with important option data such as potential volatility, delta, and investing volume, and customers cannot calculate the true intrinsic worth of the choice. The exchange can sell choices at a high premium to obtain high earnings. The user’s counterparty exchange has a natural advantage in having a great deal of real-time data on the root option. At the same time, the exchange can also make use of T-quotes in additional options exchanges. Desk reverse operations to hedge the chance as a vendor. Therefore, an individual as the option counterparty of the exchange has to keep a higher danger, even if the price of the option isn’t reasonable, it can’t be learned as a result.
Leveraged Tokens Leveraged Tokens are usually essentially tokens with leverage function, designed to offer leverage multiple benefits for the fundamental assets. Unlike leveraged investing, users do not need any guarantee and maintenance margin, nor do they have to worry about the chance of liquidation. Behind each leveraged token corresponds to a basket of root positions.
With regards to the product, the true focus on leverage multiples behind leveraged tokens will vary. Leveraged tokens utilize the exchange’s placement adjustment mechanism to improve or decrease the placement of underlying assets to maintain the target leverage. From a functional viewpoint, the function of leveraged tokens is similar to ETF _ (Trade Traded Fund, that’s, trading open-end catalog account) _ in the traditional financial field.
For example, the leveraged tokens BTCUP and BTCDOWN issued by Binance. BTCUP can realize leverage multiple gains when the price of BTC increases. Conversely, BTCDOWN can achieve leverage gains when the price of BTC drops. The container of assets related to BTCUP leveraged tokens is 123,456.78 BTCUSDT perpetual contracts. The target leverage of Binance leveraged tokens will remain between 1.5 times and three times.
Although leveraged tokens usually do not require cumbersome operations like ordinary cryptocurrencies, the mechanisms tend to be more complicated and not ideal for novices to participate. There is no case of liquidation of leveraged tokens, but compared with holding spot, long-term holding of leveraged tokens will undoubtedly be affected by everyday adjustments and everyday management charges, and assets will gradually be subject to fee wear. Thus, leveraged tokens will give full play with their advantages in the short-term unilateral market. Leveraged tokens will instantly use floating earnings to increase the underlying asset positions, making the actual leverage multiples exceed the initial leverage multiples to accomplish more returns.
The role of cryptocurrency derivatives Since the development of the cryptocurrency market, derivatives have become among the indispensable financial instruments in the market. The advancement and development of cryptocurrency derivatives have played a role in promoting the complete market, and its main roles are usually the following:
Hedging Hedging refers to the usage of derivative products by investors to protect their investment portfolios. Use the profits from derivatives to make up for deficits in the spot market, or utilize the gratitude of the spot market to offset the deficits caused by derivatives to reduce risks.
For example, a large number of bitcoin miners come to mind about the future decline of bitcoin prices after obtaining mining earnings, so they utilize the short selling system of cryptocurrency derivatives to short derivatives equivalent to expected returns to secure profits in advance. For institutional investors, the usage of derivatives such as choices and futures agreements for reverse operations can play a role in danger hedging for investment funds and enhance the awareness of resource risk control.
Speculative cryptocurrency derivatives provide retail investors with diversified means of speculation, as well as the provision of highly leveraged futures contracts can allow small-capital users to gain better profits with little gains. But with it comes higher risks. Higher leverage implies that slight fluctuations in resource prices can make users’ capital placements burst.
For some exchanges, cryptocurrency derivatives, especially futures contracts that assistance high leverage, have become one of many tools to attract users. Most novice users open up a hundred instances contract position around the exchange is definitely tantamount to betting, and expert quantitative trading teams can use market fluctuations for proper trading speculation, such as grid trading.
Value discovery In the cryptocurrency derivatives market, if the transaction volume and user base are big an adequate amount of, then derivatives could have the value discovery influence on the resource target. The costs in derivatives frequently reflect market customers’ judgments on the near future trend of the asset’s root assets, which has a particular reference significance for the future value of the spot, and can even predict the near future price of the spot market from a particular aspect.
Improving the liquidity of spot transactions At present, most of the derivatives supplied by mainstream exchanges are usually reverse contracts, which need cryptocurrency assets as margin, and users who do derivatives transactions have to hold certain cryptocurrencies to open up positions. In the case of violent market volatility, customers must continue to purchase cryptocurrencies in the spot market to serve as a margin when coming up with up positions. Alternatively, cryptocurrency assets which are profitable through derivatives investing also have to be traded in the spot market to withdraw silver. Thus, the linkage between your derivatives market and the spot market is relatively high, and the sharp increase in the investing volume of the derivatives market will also bring about an increase in the liquidity of the spot market.
Current status of cryptocurrency derivatives Market overview At present, most cryptocurrency exchanges in the market have launched derivatives investing functions, and the market share of derivatives is usually gradually expanding. According to data from CryptoCompare, the investing volume of cryptocurrency derivatives reached around US$445 billion in July 2020, an increase of 13.2% in comparison to June; the market share of derivatives in July accounted for 41% _ (38% in June) )_. It could be seen that the share of the cryptocurrency derivatives market is increasing month by month.
_ Figure 2: Investing volume of spot and derivatives in the cryptocurrency market_
In an adult traditional economic market, the trading volume of economic derivatives should take into account more than 80% of the full total trading market, while the market share of cryptocurrency derivatives only accounts for not even half. It shows that the cryptocurrency derivatives market continues to be in the early stage of advancement, but the future development space is definitely huge.
- Leveraged investing is gradually becoming replaced
Leveraged trading was introduced earlier in the cryptocurrency market. At that time, as the just derivative tool that may be shorted in the market, it fascinated a large number of investors. However, with the launch of new derivatives such as perpetual agreements, leveraged contracts no longer have advantages.
- First of all, leveraged transactions have to pay an increased borrowing fee. In margin investing, the borrower accumulates the currency borrowing fee in real time, and the fee may be higher when the requirement currency is less.
- The leverage is usually fixed and can’t be modified flexibly. Based on the regulations of different cryptocurrency exchanges, the multiples of leveraged investing are generally set three times, 5 instances, or 10 instances. Users cannot adapt the leverage multiples at any time, and they are not flexible good enough in comparison to futures contracts.
- Leveraged trading depends on the offer and demand part in the spot market. When the offer is insufficient, customers cannot carry out leveraged investing with currency borrowing.
In short, the result of capital amplification supplied by leveraged exchanges happens to be achieved by several derivative products, such as perpetual contracts. In addition, various restrictions and shortcomings in leveraged investing have also been resolved by the design of perpetual agreements. Therefore, with the emergence of more revolutionary derivatives, leveraged investing is no longer the first selection of popular derivatives for customers.
- Perpetual contracts are usually developing rapidly
Through the perspective of derivative transactions, futures contracts remain the popular derivatives of cryptocurrency exchanges. The primary reasons are the following.
- First, the futures leverage is as high as one hundred instances. The cryptocurrency exchange has almost become a gambling house for speculators, as well as the prosperity effect brought by way of a hundred instances leverage is incredibly enticement for speculators;
- Futures contract investing is easy to comprehend and simple to operate. Specifically, the unique perpetual contracts in the cryptocurrency market only require customers to judge the direction and select the leverage several to open placements. For ordinary customers, the threshold is low and does not require an excessive amount of learning cost;
- Compared with some other derivatives, futures agreements have the best liquidity. The more participants provide the better liquidity, the less transaction wear and tear when users are usually trading.
- The exchange is constantly on the introduce perpetual agreements based on altcoins. In addition to mainstream currencies such as BTC and ETH, cryptocurrencies with lower market capitalization such as XRP, EOS, and LTC can also turn out to be targets for customers to open up futures agreements. Exchanges can steadily launch agreements for little currencies based on market enthusiasm, provide customers with short-selling equipment, and attract even more users. Thus, futures contracts possess almost become a must-have product for cryptocurrency exchanges, and user participation is incredibly high.
_ Figure 3: Investing volume of perpetual agreements and delivery agreements in the cryptocurrency market_
Based on the chart supplied by Coin Metrics, perpetual contracts account for the majority of the total contract transaction volume due to their unique characteristics. According to data from TokenInsight, the transaction volume of perpetual agreements in the second one fourth of 2020 accounted for 75.2% of the full total contract transaction quantity, compared with only 39.1% in the first one fourth of 2020. The increase in this data indicates that the focus of agreement traders is moving from delivery agreements to perpetual agreements, which have become the most important agreement product of cryptocurrency exchanges.
- Option contracts come in their infancy
For option agreements, the cryptocurrency market continues to be in its infancy, and you can find only a couple of exchanges that may provide option agreement transactions. Based on the data supplied by the Skew site, just Deribit, LedgerX, Bakkt, OKEx, and CME exchange options trading quantity data are currently included, and the full total investing volume is quite small set alongside the futures agreement investing volume. The aforementioned exchanges are T-quoted standard choices, so the dependence on liquidity is incredibly high.
The prosperity and development of an option market takes a large numbers of market makers with pricing capabilities to provide it with quotation services and increase liquidity, but the present scale of the complete cryptocurrency market continues to be insufficient to support the ecological liquidity of the complete option derivatives.
_ Figure 4: Investing volume of option contracts in the cryptocurrency market_
In order to solve the issue of inadequate liquidity of option contracts in the cryptocurrency market, a straightforward version of a new kind of option was created. The advantage of this option agreement is that the user’s counterparty is an exchange, so you don’t have to be worried about bad liquidity, and it is simpler and easier to understand than traditional option operations.
But for expert institutions and quantitative hedging traders, such options possess a brief expiration date and are not suitable like long-term hedging equipment. In addition, the intrinsic worth of such option contracts after becoming packaged with the exchange isn’t transparent, specifically for expert investors and big institutions which are extremely sensitive to the price of derivatives.
Last but not least, option contracts come in the exploratory phase in the cryptocurrency market, limited by market manufacturers’ liquidity due to low trading quantity, and innovative choices products still have many issues that require period and the market to verify and improve.
- Leveraged tokens continue to innovate but investing venues are usually limited
Leveraged tokens, being an revolutionary cryptocurrency derivative, haven’t been launched for a long period. They are similar to ETFs in traditional financial markets, and their tracking targets aren’t limited to a single resource. As leveraged tokens require a cumbersome daily position adjusting mechanism, you can find currently hardly any exchanges that may offer leveraged tokens.
The launch of leveraged tokens comes from FTX, an exchange that focuses on the innovation of cryptocurrency derivatives. In addition to tracking digital currency assets, FTX furthermore provides tokens that monitor the performance of the sector, cryptocurrency volatility tokens, etc., and also released forecasts The token of the presidential applicant in the 2020 U.S. election.
It could be seen that such items raise speculation and gaming. Different assets or objects monitored by leveraged tokens can meet the trading desires of even more user groupings. The diversification and development of leveraged tokens can bring even more hot areas to the market. However, the current development period of leveraged tokens is relatively short, and you can find fewer exchanges that provide leveraged tokens, which furthermore leads to limited users.
Regulatory policies At the end of 2017, the Chicago Panel Options Trade _ (CBOE) _ as well as the Chicago Mercantile Trade _ (CME) _ launched bitcoin futures contracts; in the same period, LedgerX launched the first physical settlement bitcoin futures agreements in america. Bakkt also released bitcoin futures and choices agreements in 2019. The product is the initial bitcoin option derivative accepted by the united states Commodity Futures Investing Percentage _ (CFTC) _.
At present, in the cryptocurrency market, only the above four domestic exchanges in america have been accepted by the regulatory authorities and operate derivatives investing in compliance. In addition, there are hardly any derivatives exchanges which are compliant and controlled internationally. Exchanges with the best trading volume of cryptocurrency derivatives such as BitMEX and Deribit aren’t in fact compliant exchanges.
Judging from the current policies of varied countries on cryptocurrency, the supervision of cryptocurrency continues to be in circumstances of vagueness. Most countries still maintain a wait-and-see mindset, and there is absolutely no complete legal policy to standardize it. Because of the natural cross-regional character of blockchain technology, the exchange does not have a unified and standardized management system for cryptocurrency derivatives, as well as the laws of varied countries are not the same, and the expense of formulating unified and standardized regulatory plans is extremely high.
Derivatives, being a cryptocurrency spot financial instrument, inherently have higher risks, which ordinary investors cannot keep and control. Thus, the legalization of derivatives exchanges will be the future direction of the complete blockchain industry. The lack of regulatory plans will avoid the passions of investors from being safeguarded, and the malicious actions of some little exchanges will directly lead to the increased loss of user funds. Though it is extremely hard to adhere to derivatives exchanges, it will improve the safety of user assets, give customers reasonable legal safety, and advertise the rapid advancement of the derivatives sector in a more formal direction.
Disadvantages As the trading volume of cryptocurrency derivatives increases year by year, users have higher and higher objectives for your derivatives launched by exchanges. However, it is undeniable that the current cryptocurrency industry continues to be in an early phase, and derivatives likewise have Many shortcomings need to be resolved urgently.
- Transaction system issues
Because of the high volatility of cryptocurrency assets, it often causes violent fluctuations in multiple derivatives markets such as leveraged investing and agreements. The processing capacity of the exchange’s investing system is specially critical. If customers cannot perform operations such as shutting or adding placements in a timely manner, huge capital deficits may result. When severe market conditions occur, it is common for exchanges to decrease. Because of the lack of specialized processing capabilities of the system, it is struggling to offer users with timely operation requirements, resulting in unreasonable deficits in user assets.
At present, mainstream derivatives exchanges such as BitMEX, OKEx, Binance, etc. have experienced system downtime and stalls. If like problems continue to take place, users’ confidence in the exchange will undoubtedly be eroded as well as the derivatives investing market will undoubtedly be unfavorably developed. . The continuous enlargement of the cryptocurrency market will bring even more user traffic, as well as the exchange’s system processing capacity and stability will be the initial problem to be solved at present.
- The evil actions of trading
At present, the exchanges in the cryptocurrency market are combined, with little exchanges emerging in endlessly.