The crypto derivatives market is starting to gain strength in 2020, but 2021 could see real growth

The crypto derivatives market has shown tremendous growth in 2020 as the BTC options expiring on Christmas Day totaled nearly $ 2 billion.

2020 has been the most important year so far for the crypto derivatives market. From the Bitcoin to the ETH derivatives market, which is growing steadily throughout the year, futures and options products are available on exchanges such as the Chicago Mercantile Exchange (CME), OKEx, Deribit and Binance.

On December 31, the Open Interest (OI) of Bitcoin options hit an all-time high of $ 6.8 billion, more than three times the OI of the past 100 days, demonstrating the growing pace of the crypto derivatives market amid the current bull cycle .

The recent bull run has resulted in many new investors entering the market amid the uncertainty inherent in traditional financial markets due to the Covid-19 pandemic. These investors want to hedge their bets on the derivatives market of underlying assets such as Bitcoin and ETH.

Institutional investors are making important changes

While there are many factors driving the growth of crypto derivatives, it can be said that it is mainly driven by the interest of institutional investors as derivatives are complex products that are difficult to understand for the average retail investor.

In 2020, a variety of corporate organizations such as MassMutual and MicroStrategy have shown interest by buying bitcoin as a reserve or investing in treasury. Luuk Strijers, Chief Commercial Officer of the Deribit crypto derivatives exchange, said:

“As Blackrock’s Fink put it, ‘cryptocurrency is here to live’ and bitcoin ‘is a permanent mechanism that can replace gold’. Claims like these were the driving force behind the recent performance, but as a platform we’ve seen new entrants throughout the year. “

Strijers confirmed that Deribit sees institutional investors as a platform stepping into the crypto space with trading instruments familiar to them such as spots and options, leading to a massive surge in open interest in 2020.

The CME is also an important market for trading options and futures contracts, especially for institutional investors, as the CME is the world’s largest futures exchange for all asset classes and thus the largest futures exchange in the world. It recently even outperformed OKEx and became the largest Bitcoin futures market. “November was the best month in terms of average daily trading volume (ADV) for Bitcoin futures in 2020 and the second best month since its inception,” said a CME spokesman.

Another indicator besides institutional investments is the growth in the number of holders of large open interest (LOIH) of Bitcoin futures contracts on CME. LOIH is an investor who holds at least 25 Bitcoin futures contracts, with each contract covering 5 BTC, making the LOIH threshold equal to 125 BTC – currently more than $ 3.5 million. A CME spokesperson continued:

“We had an average of 103 large OI holders in November, 130% more than last year, and hit a record 110 large OI holders in December. The growth of large OI holders can be seen as an indicator of institutional growth and participation . “

The reality is that the crypto derivatives market is showing signs of maturity for assets like Bitcoin and ETH. Similar to their role in traditional financial markets, derivatives provide investors with a highly liquid, efficient and risk reducing method of hedging their positions against risks related to the volatility of crypto assets.

Other macroeconomic factors are also driving demand

There are a number of macroeconomic factors that are also driving demand for the crypto derivatives market. As a result of the Covid-19 pandemic, several large economies, including the United States, Britain and India, are experiencing increasingly difficult conditions due to restricted working conditions and rising unemployment rates.

This has led some governments to put in place stimulus packages and quantitative easing measures to reduce the impact on the underlying economy. Jay Hao, CEO of OKEx, a crypto and derivatives exchange, added:

“With this year’s pandemic to which many governments are responding with massive stimulus packages and quantitative easing (QE), more traditional investors are turning to Bitcoin as a potential inflation hedge. Cryptocurrencies have finally become a legalized asset class and that means higher demand. “

The mining community and income generating companies are becoming increasingly interested in Bitcoin to protect their future earnings so they can use fiat currency to meet their operating costs.

In addition to institutional demand, retail activity also increased significantly, Strijers confirmed:

“The monthly active accounts in our options segment continue to grow. The reason is social media’s attention to the potential of options. “

A CME spokesperson also said:

In terms of new account growth, a total of 848 accounts have been added so far in the fourth quarter of 2020, the most we have seen in any quarter. In November alone, 458 accounts were added. In 2020, an average of 8,560 CME Bitcoin futures contracts (approx. 42,800 Bitcoins) have been traded per day so far. “

ETH derivatives market is growing thanks to DeFi and Ethereum 2.0

In addition to Bitcoin futures and options, the derivatives market for ETH also grew strongly in 2020. In fact, CME even announced that it would launch ETH futures in February. 2021 is in itself a sign of the maturity that ETH has achieved in its lifetime.

Previously, the crypto derivatives market was monopolized by products that used Bitcoin as an underlying asset, but in 2020 the ETH derivatives market has grown to a significant extent. Strijers further explains:

“If we look at the dollar value, we see that BTC derivatives contribute most of the trading volume at Deribit, however the percentage has dropped from nearly 91% in January to nearly 91% in January. 87% in November. During peak periods During the DeFi summer, the share of BTC fell to around 70% due to the increased ETH activity and dynamics.

The reason the Bitcoin derivatives market takes a bigger share of the crypto derivatives market is because BTC is now well understood by the market and has been backed by large institutions, regulators, and a famous traditional investor. However, in 2020 there are also a number of factors influencing the demand for ETH derivatives markets. Hao believes: “The massive growth of DeFi in 2020 and the introduction of the Ethereum 2.0 beacon chain have definitely sparked more interest in ETH and the ETH derivatives market.”

Although ETH continues its bull cycle alongside Bitcoin and is likely to see increased demand for derivatives, it is very likely that BTC will be surpassed soon, Hao. Explain more:

“We will see increased demand for both the Bitcoin and ETH derivatives markets, but BTC as the number one cryptocurrency will likely see the strongest growth as funds flow from institutional investors.

2021 is considered an important year

Starting with the launch of CME’s ETH futures product in February, 2021 will be an even bigger year for the crypto derivatives market if the bull run continues. The market has also recently seen its largest option expiration, with nearly $ 2.3 billion worth of BTC derivatives expiring by Christmas.

In traditional markets, the derivatives market is many times larger than the spot market, but in the crypto market it is the other way around. So it seems that the crypto derivatives market is still in its infancy and will grow exponentially as the industry scales. As the volume of trading increases, the markets tend to become more efficient and allow better pricing of the underlying asset, as Strijers added:

“Due to the overall increased interest in the market […] We are seeing more market makers quoting our instruments, increasing our ability to introduce derivatives and futures markets, and spreads acting as the linchpin for interest rates. More attention as enforcement becomes cheaper and more efficient. “

In addition to Bitcoin and ETH derivatives, altcoin derivatives are also offered on various exchanges, most commonly a perpetual swap, but also options and contracts. Hao elaborates on altcoin derivatives and their demand outlook:

“Many other altcoins were offered for derivatives trading, especially perpetual swaps, but possibly futures as well. […] The demand for altcoin derivatives is mainly driven by retailers as some of these assets have yet to gain the trust of institutional investors. “

While institutional investors still have to flock to derivatives of these altcoins, that will change as decentralized financial markets evolve and use cases they can offer. Ultimately, this could lead to increased demand for more crypto derivatives markets in the near future.

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