Bitcoin (BTC) and ETH (ETH) dominate the crypto derivatives market, with the main platforms being Huobi, Chicago Mercantile Exchange, OKEx, Bybit, and Deribit. The Chicago Mercantile Exchange also lowered the Ether rally by launching Ether futures contracts on February 8th, which hit $ 30 million in default volumes on the first day.
Prior to this launch, there was a massive $ 1 billion options expiration on Feb.5, which resulted in bulls targeting the $ 40,000 price range, according to basic options data. But this expiration was replaced by Elon Musk’s tweet in support of Bitcoin right after the expiration event; This actually allowed Bitcoin to cross the $ 40,000 mark before entering an all-time high due to Tesla’s purchase of $ 1.5 billion of BTC.
“The use and popularity of options is increasing, which can be seen in the ever-increasing open interest numbers, trading volumes and number of clients,” Luuk Strijers, commercial director of cryptocurrency derivatives exchange Deribit, told Cointelegraph. “The higher the expiration date, the more likely it is to affect the underlying market,” he added.
Explore the derivatives market
In traditional markets, derivatives play a leading role in spot prices and asset price discovery, but this is largely due to the fact that traditional spot markets are only a small fraction of the derivatives market size.
Meanwhile, in cryptocurrency markets, the spot markets are much larger than the size of the derivative markets. But as the derivatives market booms in size, the relationship to the spot markets appears to be getting stronger.
One such metric that indicates whether the market is bullish or bearish towards BTC is the 30% to 20% delta deviation. It indicates the premium difference between neutral to bullish buy options versus similar buy options.
Jay Howe, CEO of OKEx cryptocurrency exchange, explained to Cointelegraph that the growing influence of the derivatives market on the spot markets is a positive development, saying, “As the derivatives market grows in size and importance, this is the pattern we expect to see.”
However, unlike the patterns that are expected to emerge in the derivatives market in relation to the spot markets, the price effect is often unclear. Shin Ay, in charge of product research and development of crypto derivatives at Bybit – a cryptocurrency derivative exchange – told Cointelegraph:
“The increases in OI futures should be compared with the increase in spot volumes. Contrary to popular belief, the dominance of the single delta swap and futures has seen spot volumes drop significantly since December of last year. While there are incentives to penalize over-indebted long trades when financing becomes severe , It no longer controls spot prices. “
Ben Kaslin, head of research and strategy at AAX – Digital Asset Exchange – told Cointelegraph that the extent to which BTC’s spot rate is affected by the derivatives market is overrated. However, he also pointed to the functions of derivative markets in the spot markets, stating, “Derivatives play a role in raising a more sophisticated infrastructure around Bitcoin as an asset. It attracts different investors who may not be ready to use Bitcoin directly.”
Tesla investment will open up the derivatives market
Institutional investors often look to derivatives to hedge other risks their portfolios carry. This can also be said for the cryptocurrency markets, especially since institutional investors now seem very interested in Ether as well. A report by CoinShares stated that among the $ 245 million institutional inflows seen in the cryptocurrency market in the first week of February, $ 195 million (80%) were invested in Ether products leading to the launch of CME Ether futures on Monday. February 8.
This indicates that institutional investors have begun to diversify their exposure to cryptocurrencies even further by investing in other cryptocurrencies apart from Bitcoin. This perception is only reinforced by the fact that Elon Musk has drawn a lot of positive attention to Bitcoin and even other smaller cryptocurrencies like Dogecoin (DOGE).
His outspoken support for Bitcoin through Twitter, along with his company Tesla buying $ 1.5 billion worth of Bitcoin and even accepting Bitcoin payments for Tesla products, will only push the market forward and will lead to more institutional investors to follow. Hao also talked about how this affects the derivative markets:
“As we see more Fortune 500 companies follow Tesla’s leadership and more institutional money flow into space, we will see a rise in the demand for derivatives as a tool to hedge volatility and use a more efficient risk management strategy to offset potential losses.”
Strijers noted how the price of such announcements has affected the derivatives market as well: “Such events have an immediate effect on prices and, therefore, have an effect on the prices of all derivative instruments (price and fourth high> 150%). We have seen short-term options (daily ) Moving 1000% + in a few minutes. ”Strijers also sheds some light on the perspective that institutional investors have a greater need for derivative products than average retail investors:
“Institutional adoption such as MicroStrategy, Tesla, Grayscale, etc. is paving the way for more institutions entering, many of which prefer trading traditional instruments such as spot and options. We see this through the number of new company registrations, the traditional options market makers entering the crypto space, the number of An increase in transactions executed as a block.
The market for ether derivatives is growing
With the world’s largest derivatives exchange on the Chicago Mercantile Exchange listing ether futures contracts on its platform, it signals a new push for institutional investors to enter the fast-growing Ether market. Given that the extremely profitable returns of 303% for Bitcoin during 2020 is one of the main reasons for the prevailing interest, while ETH saw gains of 469% in 2020, it has also become a desirable asset for institutional and individual investors alike.
In fact, open interest in Ether futures recently reached an all-time high of $ 6.5 billion, with the underlying futures premium indicating that investors are not necessarily eager to liquidate the Ether they hold in the midst of an ongoing rally.
Strijers clarified in more detail about the growing interest in Ether even overtaking Bitcoin for now: “CME’s launch of ETH futures is another indication of institutional interest in ETH as an investable asset.” Moreover, he added that on some days, Grayscale ETH Trust is attracting more BTC inflows, indicating that interest in ETH derivatives is increasing.
Ai takes a step forward by suggesting that investors are more careful about Ethereum fundamentals than launching Ether futures contracts at CME: “Compared to BTC in 2017, ETH today has more avenues for institutional hedging; CME listing is not actually an event. EIP-1559 and Grayscale’s acquisitions are more effective in attracting enterprises. ”
Compared to Bitcoin, which is seen as a decentralized store of value, the Ethereum blockchain offers plenty of use cases for different applications in the field of decentralized finance. This opens up more opportunities for ETH to be used in the industry.
Moreover, given the increased focus on the potential inflationary impact from the COVID-19 support packages, various assets, including commodities, are trading at all-time highs. The retail rebellion noted in the GameStop failure also helps bring in more novice retail investors to diversify with crypto assets instead of just allocating toward Bitcoin.
Howe highlighted the popularity of perpetual swaps among these investors: “Instead of waiting for the contract to expire and be delivered, perpetual swaps save time by regularly extending contracts. This will be a plus for retail investors in time.
Futures trading is also increasing in popularity among retail investors due to the fact that trading is done on margin. This leads to increased activity on centralized exchanges, the emergence of options and forecasting markets in DeFi, better educational resources than ever before, and more and more hype generated by many social media platforms. These positive changes make it easy for retail traders to diversify their trading strategies across assets, instruments, and time frames.