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Cryptocurrency derivatives market shows growth despite regulatory FUD


18 Aug 2021   #Ethereum

The cryptocurrency derivatives market will continue to flourish in 2021 despite the regulatory crackdown on the sub-ecosystem. The cryptocurrency market has successfully rebounded from the two-month slump it had gone into from late May to the end of July. Bitcoin (BTC) and Ethereum (ETH) have been leading the charge, posting impressive gains over the last two weeks. The market is seeing price levels that it had reached back in May of this year.

Along with the price gains, the cryptocurrency derivatives market that includes financial instruments like futures, options and even micro futures are also seeing rejuvenated interest from investors. According to data from Bybt, The open interest (OI) in Bitcoin options across all the global exchanges offering the product has more than doubled from the yearly low of $3.63 billion on June 26, hitting a 90 day high of $7.86 billion on Aug. 14.

Cointelegraph discussed this spike in OI with Shane Ai, head of product R&D at Bybit, a cryptocurrency derivatives exchange, who said: “The rise in Option OI is mostly driven by institutional players, and the rising popularity of third-party OTC platforms has facilitated easier execution of multi-legged strategies with deeper liquidity — which are prerequisites for more institutional participation.” Data from on-chain analytics provider CryptoQuant also reveals that institutions are buying BTC in the same manner as they did back in late 2020. 

A similar spike in growth is seen in the metrics of the Ether options market as well. The OI in Ether Options jumped 75% from $2.42 billion on 30 July to hit a two-month high of $4.26 billion on Aug. 14. This puts the year-on-year (YoY) growth for this market at 846%.

Notably, the crypto derivatives market is still in the nascent stages of its development, as it only sprung into existence in Q2 2020. Even global investment banking giant Goldman Sachs announced their plans earlier in June to expand its foray into the cryptocurrency markets with Ether options.

CME data reveals strong growth in 2021

The growth is seen even in the crypto derivatives products offered by the Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange. CME is often considered to be a benchmark for institutional interest. Currently, they have four crypto derivatives offerings, Bitcoin Futures, Ether Futures, Micro Bitcoin Futures and Bitcoin Options.

According to the data provided by CME, as of Aug. 11, the average daily volume (ADV) in their Bitcoin futures has grown nearly 30% from 8,231 contracts year to date in 2020 to 10,667 contracts year to date in 2021. In the same duration, the open interest for these futures grew by 18.6% to 8,988 contracts year to date in 2021.

While CME has been offering their BTC futures and options since 2017 and 2020, respectively, the exchange launched both their Ether futures and Micro BTC futures earlier this year in February and May. Since their launch on Feb. 8, CME Ether futures have had an ADV of 2,864 contracts with open interest averaging at 2,436 contracts. A record volume of 11,980 contracts was traded on May 19, and a record OI of 3,977 contracts on June 1.

In the case of CME Micro BTC Futures, they have had an ADV of 21,667 contracts with their OI averaging at 19,990 contracts. This product is designed to enable even retail investors to manage their Bitcoin price risk. Its size is 1/10th that of a Bitcoin and has traded 1.5 million contracts since the launch. An all-time high of 94,770 contracts was traded on May 19 with a record open interest of 38,073 contracts being attained on June 1.

Cointelegraph discussed this growth in the markets with Luuk Strijers, chief commercial officer of crypto derivatives exchange, Deribit who stated: “We have seen incredible growth in Q1 and Q2 this year showing the potential of derivatives and, in our case specifically, options driven by ever-increasing client demand. We expect this trend to continue as we are onboarding an increasing number of (institutional) clients.”

Organic growth supported by ETH activity

Strijers added that the spike in OI in August was not only due to the rise in price leading to the notional value growing but also due to the expansion of the number of open contracts after the large Q2 expiry for BTC options. This reveals that the OI growth that the market is currently undergoing is organic and not just a by-product of the notional value rising. He mentioned that this effect was even larger for Ether, adding:

“The latter is explained by the launch of EIP-1559 and the consequence that nearly $100m worth of ETH has been burned since the upgrade. Furthermore, the NFT hype results in a lot of people buying NFTs, using their ETH and buying upside calls instead to avoid missing out on the potential upside.”

The Ethereum network finally underwent the London upgrade on Aug. 5 which ushered in the much anticipated Ethereum Improvement Proposal (EIP) 1559 that changes the transaction pricing mechanism for the network and the management of the fees. Strijers opined on how the London hard fork impacted the upwind for ETH, saying, “The market seems to appreciate the London fork changes. A lot of ETH was already locked in smart contracts or staked, and now the supply is getting even more scarce due to the gas burn mechanism, driving prices upwards.”

Ai mentioned more on the specific impact of the hard fork on the ETH derivatives market, saying that the ETH IV term structure has gone into contango (a scenario where the futures price of the asset is higher than the spot price), alongside steeper call-put skews as trends further in time are observed. Steeper skews could often indicate higher prices for Out of the Money (OTM) put options and lower prices for OTM call options.

Several players in the industry are innovating with automated solutions to simplify Bitcoin options trading for retail investors. Delta exchange, a crypto derivatives platform, recently launched automated trading under the product name “Enhanced Yield” for BTC, ETH and Tether (USDT).

Regulators frown on derivatives trading

Despite the immense growth of the crypto derivatives market, or rather because of it, regulatory authorities are often known to be skeptical of the sector. In the recent past, various organizations have extended their cautionary warnings to curbing actions for players offering these financial instruments in the market. In a very public settlement, BitMEX has agreed to pay $100 million to the United States Commodities Futures Trading Commission (CFTC) and the Financial Crimes Enforcement Network (FinCEN) to put a case filed in the U.S. District Court on Oct. 1, 2020, to rest. The CFTC charged BitMEX owners with “illegally operating a cryptocurrency derivatives platform” and Anti-Money Laundering (AML) violations.

In another instance of regulatory bodies increasing their scrutiny on the derivatives trading sub-ecosystem, global cryptocurrency exchange Binance has announced that they will be shutting down derivatives trading in the European region, beginning with Germany, Italy and the Netherlands. In addition to the EU region, Binance has also announced that they would be restricting access to derivatives products for its users in Hong Kong. CEO Changpeng Zhao mentioned that it was a measure to establish “crypto compliance best practices worldwide.”

Early in January this year, the United Kingdom’s Financial Conduct Authority (FCA) banned crypto exchanges from selling crypto derivatives and exchange-traded notes (ETNs) to retail consumers. The regulatory authority cited the reason for this ban as that these products are “ill-suited for retail consumers due to the harm they pose.”

Despite regulatory organizations cracking down on crypto derivatives, the futures and options markets have continued to show immense growth this year. A report by Inca Digital revealed that hundreds of traders in the U.S. are evading local regulations and trading crypto derivative assets on exchanges like FTX and Binance. These platforms have official U.S. counterparts that don’t offer derivatives products on their platform due to regulatory concerns.

However, Brett Harrison, president of FTX.US, the U.S. counterpart of FTX, recently stated that the platform aims to offer crypto derivatives trading in the U.S. in less than a year. Harrison also mentioned that as institutional investors are responsible for nearly 70% of the trading volume of FTX.US, their current aim is to grow their retail base in the country.

This reasoning could be the driving force behind the exchange’s recent decision to hire Kevin O’Leary — aka Mr. Wonderful of Shark Tank fame — as the brand ambassador and official spokesperson for FTX.

While that could be pure conjecture, the growth of the crypto derivatives market is undeniable and inevitable in the future as the liquidity improves. These instruments that provide hedging and risk solutions are much needed by investors, especially in these times of high volatility.


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