Viewpoint | By the end of 2020, encrypted derivatives or 20 times the size of the spot market

The crypto-derivative market is likely to grow exponentially. Mark Lamb, CEO of CoinFLEX, predicts that by the end of 2020, the derivatives market will reach 20 times the size of the underlying spot market in a series of recently launched exchange products.

“More and more hedge funds and financial experts are aware of the opportunities that this area brings,” said Phillip Gillespie, CEO of B2C2 Japan, a cryptocurrency liquidity provider based in Tokyo. “This means that the derivatives exchange will bring more trading volume, and more liquidity will enter the entire ecosystem. So this is a noteworthy feedback loop.”

Recently, investors have seen a wave of new cryptographic derivatives that allow traders to bet on price increases and falls. Although the profit opportunities offered by these tools are much larger than the initial share, if the investor chooses the wrong bet, the position will be liquidated and all funds will be lost. Encrypted derivatives can be high risk given the high volatility of cryptographic assets. However, it is a matter of course that high risks can bring high returns.

LedgerX, a New York-based cryptocurrency exchange, launched a bitcoin call option in July. Also in July, ErisX, a Chicago-based cryptocurrency exchange, obtained a Derivatives Clearinghouse License (DCO) that allowed the agency's upcoming clearing house to liquidate digital asset futures contracts in the United States. In February, CoinFLEX in Seychelles launched its own physical delivery encryption futures service.

At the same time, Malta-based cryptocurrency exchange OKEx launched a cryptographic derivative called Perpetual Swap in December 2018. BitMEX in Seychelles offers up to 100 times more leverage for its derivatives. According to The Block, Bitfinex, a Hong Kong-based cryptocurrency exchange, has announced plans for a derivative product that will provide investors with up to 100 times more leverage.

According to a research report released by Diar in cryptocurrency research company in May, the trading volume of derivatives exchanges has reached a record high due to the active participation of institutional investors. According to Investing.com, the Chicago Mercantile Exchange (CME) traded $ 8.6 billion in bitcoin derivatives in May. According to the encrypted data analysis company skew, in May, the cryptocurrency exchange Deribit reached nearly 600 million bitcoin options on weekends.

According to a blog post on the official website, Kraken, based in San Francisco, said its Kraken Futures 24-hour trading volume reached a record $350 million at the end of June. Timo Schlaefer is the founder and CEO of Crypto Facilities, which was reorganized into Kraken Futures after the acquisition of Kraken. He said: "We expect derivatives to boost the growth of the encryption market, as we have seen in traditional financial markets. Ultimately, this will reduce price volatility and increase market efficiency and transparency."

Kraken Futures offers retail and institutional investors a diverse portfolio of Bitcoin, Ethereum, XRP, Litecoin and Bitcoin cash, up to 50 times leveraged. Schlaefer said that as investors use these tools to complement spot trading strategies, the exchange plans to expand its derivatives portfolio to respond to customer demand. Kraken's trading platform includes an API for algorithmic trading that provides a low-latency matching engine and an instant margin system to manage derivative positions.

“By the end of 2020, the size of the crypto-derivatives market will reach 20 times the size of the underlying spot market,” said CoinFLEX CEO Mark Lamb.

“I think cryptographic derivatives are part of an evolution. All growth can be achieved here.”

CoinFLEX allows traders to bet with a minimum of $100 and provides up to 20 times leverage. If the “multiple order” is successful, the bitcoin will be obtained; if the “empty order” is successful, the USDT will be paid to the user's account. “The exciting thing about cryptographic derivatives is that it's more open, and people with different net worth income can use these products,” Lamb said. “If you think about traditional financial derivatives, then only the high net worth people can reach them because of the liabilities involved.”

The Seychelles-based exchange has not yet been approved by US regulators, with a focus on the Asian region, and according to reports, a large number of proprietary trading companies are trading their futures contracts. “It has a much larger market for cryptographic derivatives and a much lower threshold,” Lamb said. “It allows us to serve more investors in the currency circle. Not only the institutions that enter the encryption field, but also the large retail investors, and those who may not have worked with the same agencies and intermediaries, have not dealt with this. A complex level of individual users."

According to Philipp Kallerhoff, founder of Protos Asset Management in Zurich, crypto-derivatives can reduce transaction costs and provide an alternative to the high-cost encrypted hosting solutions currently offered by banks. "You don't want to bother to settle your bitcoin and send them to other places," he said. "You just want to have a risk position."

According to B2C2's Gillespie, the attractiveness of crypto-derivative exchanges is due to their ability to help investors bypass the traditional financial system. He says:

“BitMEX is very popular because you can send Bitcoin, you can use Bitcoin as a collateral. Again, you don't have to go through the banking channel. Of course you can go to a big bank and say I want to send $100,000 to BitMEX. But some The bank will refuse to process the remittance to the exchange. BitMEX only accepts bitcoin, which completely avoids this problem. This is why some of these exchanges have grown so large."

In spite of this, the exchange must improve the KYC and anti-money laundering (AML) procedures, Gillespie said. He also warned that newcomers who are led by technologists into the field of cryptographic derivatives, but lack sufficient financial acumen, may "explode."

He said: "For the startups and exchanges that don't have a clear understanding of their behavior, the most dangerous thing is to provide high leverage and say: Go, trade."