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The crypto trading arena is rapidly expanding into derivatives, with hopes that tighter regulation and the promise of highly leveraged returns will lure cautious investors into the market.
Dutch crypto futures and options exchange D2X will launch next month, while London-based One Trading and GFO-X are both set to launch early next year.
They will join other derivatives new entrants like Bermuda-based US-based Kraken this month to challenge leaders CME Group, Binance and Bybit for a share of the fast-growing market.
Bitcoin's price has risen more than 50% this year to more than $67,000, and derivatives have become increasingly central to the digital asset market.
According to CCData, futures and options trading accounts for 71% of the total trading volume of digital assets. Open interest, a measure of market depth for crypto derivatives, exceeded $40 billion for the first time this year.
The appeal of derivatives for many traders is that they allow them to borrow large sums of money to increase their stakes in markets where loans were wiped out in the 2022 market crash and have yet to be repaid. Large financial institutions such as Genesis, BlockFi, and Celsius once provided credit to investors, but they have failed and have not been replaced on a large scale.
“Derivatives give you leverage,” says Jason Urban, global head of trading at Galaxy Digital.
Since the collapse of many crypto lenders, “people naturally wanted to find ways to gain that leverage because unsecured borrowing was gone from the ecosystem,” he said.
Derivatives allow traders to gain exposure to crypto tokens such as Bitcoin and Ether by only incurring a portion of the cost of purchasing the tokens. According to the website, investors can borrow up to 125x their original stake on Bybit and up to 50x on Kraken.
Traders say exchanges are turning their attention to derivatives as Bitcoin prices soar and the arrival of Spot Bitcoin and Ether exchange-traded funds attracts new investors.
Nico Cordeiro, chief investment officer at U.S. crypto hedge fund Strix Leviathan, said major U.S. exchanges are “aggressive” in trying to capture more trading volume in their venues and are jumping on the phone. He said he is asking traders to demonstrate new products and features. “Being a regulated exchange is tough,” he says.
Chicago-based CME Group, the market leader, has repeatedly hit record levels in trading volume and open interest this year as investors flock to regulated exchanges that are rolling out new derivatives contracts on the back of popularity. are. These include Bitcoin Friday Futures, a weekly contract that coincides with the New York trading week.
“Every few days they say something like, 'Why don't we make it taste better this way?' or 'How can we get more business from you?' . . . They try every means they can. ,” one crypto trader said of existing exchanges competing for business.
Additionally, derivatives are paid in advance in the spot or cash market for cryptocurrency trading, which puts the trader at risk if the trade goes wrong, and at the same time quickly depletes trading resources. , fascinating.
Cordeiro said CME's trading volume is booming because it's “a place where all the highly regulated investment managers get exposure,” adding that it's “the only place in the U.S. where you can get really good capital efficiency.” “The place,” he added.
Many investors also avoid trading the underlying tokens for fear of being pursued by the Securities and Exchange Commission, which has filed a series of lawsuits against companies for offering unregistered securities. Still, regulators approved Bitcoin ETF options last week.
As a result, new exchanges targeting institutional investors are emphasizing regulatory compliance in an effort to reassure investors.
“We are the only venue in Europe that can offer perpetual futures and allow retail and institutional clients to trade directly in the same venue,” said Josh Barraclough, CEO of One Trading. The group is based in London but holds a regulatory license in the Netherlands, allowing it to trade within the EU.
Barraclough added that the company will embark on a “strong marketing campaign in Europe” next year to attract investors to do business there.
Meanwhile, Nasdaq-listed Coinbase is in the final stages of acquiring a Cyprus-based company with an EU regulatory license, which would also allow it to launch regulated crypto derivatives in the region. .
