The Coming Crypto Derivatives Boom

By Jonathan Joe Morgan


The crypto derivatives market may be poised for exponential growth. CoinFLEX CEO Mark Lamb forecasts it will be 20 times the size of the underlying spot BTC market by the end of 2020, amid a recent flurry of exchange offerings.

“More and more hedge funds and more and more financial experts realize that there is an opportunity in this space,” says Phillip Gillespie, CEO of B2C2 Japan, a cryptocurrency liquidity provider in Tokyo. “That means more volume going through the derivatives exchanges, and more liquidity coming into the overall ecosystem. So it is an interesting feedback loop.”

Investors have witnessed a recent wave of new crypto derivatives offerings, which enable traders to place bets on rising — and falling — prices. While the instruments provide the opportunity for profits far greater than an initial stake, if an investor makes the wrong bet, his or her position is liquidated, resulting in the loss of all funds. Given the high level of volatility in digital assets, crypto derivatives can be high risk. But of course, high risks can come with high rewards.

LedgerX, a New York-based cryptocurrency exchange, launched a Bitcoin call option product in July. ErisX, a Chicago-based crypto futures exchange, obtained a derivatives clearing organization license (DCO) in July too, allowing the exchange's upcoming clearinghouse to clear digital asset futures contracts in the U.S. The Seychelles-based CoinFLEX launched its physically delivered crypto futures service in February. 

Meanwhile, OKEx, a Malta-based cryptocurrency exchange, launched a crypto derivatives product, dubbed a Perpetual Swap, in December 2018. Seychelles-based BitMEX offers up to 100 times leverage on its derivatives offering. The Hong Kong-based cryptocurrency exchange Bitfinex has unveiled plans for a derivatives product that will offer investors up to 100 times leverage, according to a report in The Block.

Research by cryptocurrency data analyticsresearch firm Diar published in May reported record volumes on derivatives exchanges, driven by increased activity from institutional investors. The Chicago Mercantile Exchange (CME) reported $6.6 billion in Bitcoin derivatives trading volume in May, according to Cryptocurrency exchange Deribit reported weekend Bitcoin options trading volume of almost 600 million in May, according to skew, a crypto data analytics firm.

San Francisco-based Kraken said trading on Kraken Futures reached a record $350 million 24 hour volume in late June, according to a blog post on its website. Timo Schlaefer, the founder and CEO of Crypto Facilities, which Kraken acquired and rebranded as Kraken Futures, says: “We expect derivatives to power the growth of the crypto markets, much like what we’ve seen in the traditional financial markets. Ultimately this will reduce price volatility and enhance market efficiency and transparency.”

Kraken Futures offers leverage of up to 50 times on a variety of derivatives products to both retail and institutional investors in Bitcoin, Ethereum, XRP, Litecoin and Bitcoin Cash. The exchange has plans to expand its portfolio of derivatives products in response to client demand as investors use the instruments to compliment spot trading strategies, according to Schlaefer. Kraken’s trading platform, which includes an API for algorithmic trading, offers a low latency matching engine and an instant margining system to manage derivatives positions.  

“The size of the crypto derivatives market will mushroom to 20 times the size of the underlying spot BTC market by the end of 2020,” says CoinFLEX CEO Mark Lamb. “I think crypto derivatives have been part of an evolution. This is where all the growth is.” 

CoinFLEX enables traders to place bets with up to 20 times leverage for as little as USD$100. A successful “long” trade on rising prices garners Bitcoin while a successful “short” trade on a drop in prices is paid out into a user’s account in Tether (USDT). “The exciting thing about crypto derivatives is that it is more open and accessible to anyone of any level of net worth,” says Lamb. “If you think about traditional derivatives, they are only really accessible to high net-worth people because of the liabilities involved.”

The Seychelles-based exchange, which hasn’t yet obtained regulatory approval in the U.S., has a focus on Asia and has reported an influx of proprietary trading firms trading its futures contracts. “It [crypto derivatives] is a way bigger market, it is a way easier market,” says Lamb. “It enables us to deal with more crypto native investors. Not just the types of institutions that are in crypto but also the retail whales, individual users that may not be dealing with the same institutions and middlemen and layers of complexity.”

Philipp Kallerhoff, founder of Protos Asset Management in Zürich, says crypto derivatives can lower trading costs, and provide an alternative to high-cost crypto custody solutions offered by banks. “You don’t want to bother with settling your Bitcoin and sending them around,” he says. “You just want to have the risk position.”

The appeal of crypto derivatives exchanges has been bolstered by their capacity to enable investors to bypass the traditional financial system, according to Gillespie of B2C2. “The reason BitMEX is very popular is that you can send Bitcoin, you can post collateral in Bitcoin,” he says. “Again, you don’t have to go through the banking channel. You can go to a major bank and say I would like to wire $100,000 to BitMEX. But some banks won’t process the wire to an exchange. BitMEX only processes via Bitcoin, avoiding the issue altogether. This is a component of why some of these exchanges have gotten so big.”


Still, Gillespie says, exchanges must improve (KYC) and anti-money laundering (AML) procedures. He also warns that new entrants led by technologists who enter the crypto derivatives space and lack sufficient financial acumen will “blow up.” 

He says: “The most dangerous thing for startups and exchanges that don’t know what they are doing is to offer a lot of leverage and say: go ahead and trade.”

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