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The Evolution of the Cryptocurrency Derivatives Market

January 8, 2021
We believe the emergence of cryptocurrency derivatives is the inevitable evolution of the digital asset class and should contribute to reductions in volatility and enhancing market efficiency.

 Derivatives are contract-based financial instruments, such as futures, options, or perpetual swaps, that enable investors to place bets on a falling or rising price of various tradeable assets such as equities, bonds, currencies and commodities, read our Beginners Guide here

Indeed, derivatives give more balance and safety to the markets partly due to volume and partly due to greater hedging and structuring opportunities. Furthermore, some cryptocurrency derivatives are being seen as falling under the provisions of MiFID II[1], which has served to bolster investor confidence. As derivatives play a key role in institutional investment strategies, they represent a seismic force in the maturation of the asset class.

Major Milestones

Crypto derivatives have only been available for two years, but have gained substantial traction in this short space of time. Volumes hit a record high in May 2020, soaring to market volumes of $602 billion, partially attributable to speculation surrounding the bitcoin halving event.[2] Trading volumes for crypto derivatives then reset new-record levels in tandem with Bitcoin’s August 2020 rally, as a $12,000 price surge spurred on investor appetite and speculation. August derivatives volumes, for example, were in excess of $710 billion.[3] To put this in context, spot volumes for the same month are reported to be to $945 billion[4].

 

How Crypto Has Led the Way in Democratizing Access to Derivatives

 

In conventional financial markets, derivatives remain largely unavailable to non-accredited investors. The emergence of crypto derivatives, which are available across a growing number of exchanges therefore represent a notable levelling of the playing field, allowing ordinary traders to participate in this opportunity for wealth creation. The magnitude of this development should not be understated - it reflects the founding principles of bitcoin, which was designed to tackle the inequality inherent in a system which bequeaths unrivaled access to a privileged few and stifles the monetary autonomy of the masses. Providing public access to crypto derivatives represents a milestone towards the crypto-sphere’s promise of a more inclusive and accessible trading ecosystem.

 

Stumbling Blocks

While the availability of crypto derivatives has been a momentous advancement for the sector, it has not been without its challenges - launched in a race to market, with shaky infrastructure and inadequate security parameters. Furthermore, as incumbent players neglected to fully integrate their spot and derivatives platforms, traders must traverse across interfaces, which has transpired not only to be quite cumbersome, limiting traders ability to act with agility in response to opportunities, but has resulted in additional fees from shuffling funds around. As these spot and derivative exchanges operate across different platforms, traders are unable to leverage combined collateral.

The Benefits of Consolidated Offerings

Consolidated exchange platforms that offer spot and derivative optionality in an efficient solution, will be a major attraction for sophisticated investors and will be a key bastion of the market's maturation.  In an optimal situation, you could leverage your coins sitting in ultra-secure integrated custody, across both spot and derivative offerings. 

 The EQUOS Advantage: Leverage Combined Collateral and Minimize Risk

Raising the bar for governance in this space, EQUOS will ensure that traders are never unable to meet their obligations by effectively closing positions once they run out of capital to back these positions. This is commonplace in traditional finance, acting as a safeguard to ensure that investors cannot rack up losses that have recourse beyond the capital that they hold in their trading accounts. Essentially, this means that traders only run the risk of making losses on the funds that they put in.

 EQUOS is a USDC native platform, all of our products effectively settle in USDC, derivatives will be priced and funded in USDC. If you do not hold USDC on the platform, you can pledge other digital currencies on the platform as collateral to trade - you are not obligated to convert.

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 EQUOS is designed for financial institutions and built to improve the experience of trading digital assets for everyone, with increased security, innovative products, global compliance standards, transparent fees, and significant transparency gains. EQUOS seeks to redesign a product that to date has disadvantaged investors across many of the incumbent platforms, improving capital efficiency and delivering collateralization processes that can substantially grow what is a nascent derivative market.

 

 

 

 

 

 

 

 




[1] FCA - Statement Regarding the Regulation of Cryptocurrency derivatives https://www.fca.org.uk/news/statements/cryptocurrency-derivatives

[2] Coindesk - August’s Bitcoin Rally Led to Record Crypto Derivatives Volumes: Report

Sep 7, 2020

https://www.coindesk.com/bitcoin-price-rally-crypto-derivatives-cryptocompare

[3] CryptoCompare August Exchange Review 2020 - https://data.cryptocompare.com/reports/exchange-review-august-2020

[4] Finance Magnates - https://www.financemagnates.com/cryptocurrency/news/crypto-derivatives-volumes-rise-to-record-712-billion-in-august/

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