By Jude Ayua
Crypto trading platforms are expanding into derivatives, hoping to lure risk-averse investors with the promise of highly leveraged returns amid increased tougher regulation. Financial Times (FT) reported several firms planning to turn to derivatives and those already in it.
“Next month Dutch crypto futures and options venue D2X will launch while London-based One Trading and GFO-X are both planning to launch early next year. They will join other new derivatives entrants like the US’s Kraken, which launched a Bermuda-based venue this month, in taking on leaders CME Group, Binance and Bybit for a share of a booming market,” the report stated.
Furthermore, Nasdaq-listed Coinbase is planning to purchase a Cyprus-based entity with a European Union (EU) licence to allow it launch crypto derivatives in the EU.
What are derivatives?
Derivatives mean “a type of financial contract whose value is dependent on an underlying asset, a group of assets, or a benchmark.” They are agreements between two or more parties that can be traded on an exchange or over the counter (OTC). Derivatives take various forms, such as stocks, bonds, economic indicator derivatives, commodities, currencies, interest rates, and market indexes.
Read also: Margin and Futures Trading: Benefits and Risks
The use of derivatives
Derivatives are useful in trading for a variety of purposes. They may be used by traders to access specific markets and trade different assets. They could serve as a form of “advanced investing.” In crypto trading, derivatives enable traders to better understand a crypto token while investing a little amount into it.
Industry experts and traders have expressed optimism in the benefits of derivatives in crypto trading. “Derivatives give you leverage,” noted Jason Urban, the global head of trading at Galaxy Digital. Some have noted that derivatives help to watch out for unreliable exchanges.
Nico Cordeiro, chief investment officer at Strix Leviathan, noted how “aggressive” large US exchanges are in trying to get higher volumes on their platforms and marketing new products and features.
“Every couple of days they’re like ‘what if we sweeten the pot this way’, ‘how can I get more of your business’ . . . they’re using every lever they can,” said a crypto trader, about incumbent exchanges vying for business.
Derivatives are also useful in mitigating market fluctuations. Unlike the spot or cash crypto trades in which traders get paid in advance, and are exposed if deals go wrong, derivatives help traders to save their investments from collapse.
FT reporter Nikou Asgari noted the role derivatives have played in the current bitcoin all-time high.
“The price of bitcoin has risen more than 50 per cent this year to more than $67,000, and derivatives are increasingly the heart of the digital assets market … Open interest, a gauge of market depth, for crypto derivatives has topped $40bn for the first time this year…” said Asgari.
Derivatives are increasingly becoming preferred because of their benefits in crypto trading. As bitcoin is projected to hit $100,000 by the end of 2024, derivatives may be an option for traders to secure their investments. Perhaps more exchanges across will venture into derivatives.
Read also: Liquidations: How do I minimize losses and avoid getting liquidated when trading futures?
About the Author: Jude Ayua is a policy analyst at CAB. A lawyer, Jude is an associate at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group. He is also a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. jude@infusionlawyers.com
