Bitcoin Derivatives Demand Is Growing In 2019 Despite ETF Refusals; Market Shows Maturity?

2019 has been a fascinating year in the development of the cryptocurrency markets. 2017 and 2018 represented a kind of rapid-fire version of the typical economic boom-and-bust cycle. However, 2019 has seen the markets for Bitcoin and other major cryptocurrencies enter a new phase of maturity. So much so, that they’re now coming to more closely represent the traditional financial markets. 

One obvious maturity indicator is volatility. The Bitcoin volatility index shows that price fluctuations have been lessening significantly over time. Of course, by the standards of most fiat currencies, it’s still highly volatile, and peaks and troughs still occur. For example, in June when Bitcoin suddenly spiked above $13,000. However, for the most part, 2019 has seen extended periods come to pass without the kinds of significant swings that have been typical for most of Bitcoin’s lifetime. 

This year, Bitcoin dominance has also risen to levels unseen since before the ICO boom of 2017. In early September, Bitcoin accounted for over 70 percent of the total cryptocurrency market cap for the first time in over two and a half years. 

This dominance is intriguing, as there are many more altcoins around these days than there were pre-boom, so it implies investors are shunning altcoins in favor of Bitcoin. The influx of institutional interest in Bitcoin over this year would account for that, as institutions prefer Bitcoin as a more established asset than altcoins. 

Data from Grayscale Investments illustrates this institutional preference for Bitcoin. The cryptocurrency investment services provider recently published its quarterly report showing an acceleration in institutional investment in Bitcoin during this year.

Source: Grayscale Investments  

Crypto-Derivatives Are Creating More Choice for Investors

One attraction for institutional traders and investors is the increasing availability of cryptocurrency derivative products, which provide vehicles similar to those on the traditional financial markets. These are still relatively new, given CME and Cboe only introduced the first cash-settled Bitcoin futures for institutions at the end of 2017. 

Cboe since dropped out of the market, which it may be regretting since CME has been reporting growing trading figures this year. 

In May, CME also reported a record trading month on Bitcoin futures, and by July, it had traded over 2 million contracts. 

These successes were replicated in the retail markets, as well. BitMEX, which has the biggest market share in retail Bitcoin futures, underwent a record trading day in June with over $1bn in open interest. 

Furthermore, 2019 has seen an increasing number of trading platforms enter the crypto-derivatives markets. Binance has recently launched its futures offering, and Kraken acquired British crypto futures exchange Cryptofacilities in March, later rebranding to Kraken Futures. Other new entrants include Bybit and Coinflex. It’s fair to say the market is growing fast. 

What Options for Options? 

Despite the rapid expansion of cryptocurrency futures, options are still a relatively unexplored market, indicating that the development of crypto derivatives is still very much evolving. Although there are now a small handful of exchanges offering options to retail traders, Dutch-owned Deribit was the first to market and continues to dominate the space. It started out in 2016, providing European-style cash-settled options, along with futures, backed by Bitcoin. Earlier this year, it started offering Ethereum-backed options and futures too. 

Deribit has also been expanding its footprint in other areas. For example, it recently partnered up with Paradigm to offer a block trading solution to institutional investors. Previously, traders would have to agree to a block trade off the books using a messaging app, then carry it out privately. The new solution enables the discussion via Paradigm’s chat interface, and the deal is then executed by Deribit off the order book.

Features such as these will help to give Deribit the edge in an options market that looks set to replicate the success of cryptocurrency futures. CME recently confirmed it would soon offer options on Bitcoin futures. ICE-backed Bakkt has also indicated that it intends to venture into options, after a shaky start to its regulated physically settled futures trading platform. 

Regulatory Challenges

On the topic of regulation, lawmakers continue to present challenges for other crypto-backed products, particularly in the US markets. The SEC recently rejected a Bitwise ETF, citing concerns about market manipulation through wash trading. The concern is valid- reports suggest that up to 95 percent of trading volume could be attributed to wash trading.

Neither is this the first time the SEC has rejected a Bitcoin ETF. The Winklevoss twins applied twice only to get the thumbs down, and in September, Van Eck withdrew its application in anticipation of a refusal.

However, outside of the US, things are moving somewhat faster. Swiss provider Amun has been releasing a steady stream of products over recent months. In early October, the company launched the first collateralized ETP, in collaboration with Bitcoin Suisse. It’s designed with Swiss retail investors in mind and is traded on the regulated SIX digital asset exchange. More recently, the company also started offering an ETP backed by the Binance coin. 

A Self-Fulfilling Evolution

The influx of institutional investors to the cryptocurrency markets is creating a self-fulfilling cycle where demand for more sophisticated products attracts more investment. Furthermore, this demand puts increasing pressure on the regulators to compromise, and on the cryptocurrency markets to continue to mature. 

Although there’s still some way to go before the cryptocurrency markets can be said to have fully matured, all the signs are there that Bitcoin is growing up. It’s going to be interesting to see how this plays out in terms of Bitcoin’s notorious price volatility into 2020 and beyond.

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