Crypto Derivatives: A Corner of the Market or the Market Itself?

Published on by Coindesk | Published on

Almost every week, a new player is announcing its intention to enter the increasingly crowded crypto futures market.

As the market entered a prolonged downturn starting in 2018, market participants looked for ways to profit from, or at least hedge against, the falling prices.

The conjunction of those two events is widely seen as having started a glory period in derivatives products across all asset classes.

Derivatives have gradually become the place where the majority of interested parties are coming to trade - across all markets.

Academics have extensively researched the impact of developing derivatives markets on the volatility of underlying assets and have overwhelmingly concluded that derivatives help to stabilize prices.

The UK FCA is taking even more drastic action by planning to ban the offering of crypto derivatives to retail investors.

It is likely that, over time, regulators or simply Darwinism will increasingly put the derivatives market in the hands of professionals.

Derivatives volumes are mostly a function of leverage.

As trading occurs on margin, derivatives exchanges have been careful to design a spot price index derived from the price of what were, initially, much larger physical exchanges.

As the derivatives market has grown exponentially, we have now entered a period where the underlying physical exchanges are much smaller than the derivatives exchanges - only 10% of total volumes in aggregate.

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