BTC and ETH Crypto Derivatives in Demand, Market Expected to Grow Further

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The crypto options market has been evolving rapidly over the second quarter of 2020. According to TokenInsight’s recent crypto derivatives industry report, trading volumes are seeing a 166% year-on-year increase compared to Q2 2019. 

The derivative products driving these volumes are futures and options. While futures grow with traders betting on a bullish price sentiment, both open interest and volumes of options have reached all-time highs.

All-time highs 

On Wednesday, open interest in Ether (ETH) options hit an all-time high of $351 million on Deribit and $37 million on OKEx. In fact, open interest in Ether options is 2.5 times higher than it was at the start of July.

A day prior to the major Bitcoin (BTC) options expiry event seen on July 3, Bitcoin options interest hit an all-time high of $1.7 million on Deribit and $268 million on CME, while daily volumes on Deribit doubled their all-time high, surpassing 47,500 contracts traded on July 28. 

This all-time high seen the day before its expiration on the last Friday of the month could often mean the increasing acceptance of options and structured products, especially considering the record OI’s hit even on CME, which is the largest derivatives exchange in the world.

Luuk Strijers, the chief commercial officer of Deribit, spoke of OI being the best indicator to gauge the market, telling Cointelegraph: “Open interest is the best indicator to assess market adoption, and looking at the charts, it is apparent we are close to the end of July highs.” He added: “BTC options open interest is currently 116K contracts with a notional value of USD 1.5 billion.”

New horizons for investors

Options are financial instruments that allow investors to buy or sell an underlying asset depending on the type of contract they hold. Call options give holders the right to buy an asset at the strike price within a certain timeframe, while put options give holders the right to sell an asset in similar conditions. Denis Vinokourov, the head of research at BeQuant — a crypto exchange and institutional brokerage provider — told Cointelegraph:

“Options are a very efficient way to hedge exposure to the underlying product, be that Bitcoin or Ethereum spot or even futures/perpetuals. In addition to that, it is easier to structure products that would offer ‘yield,’ and it is this that has been particularly appealing to market participants, especially in the wake of sideways market price action.”

Lennix Lai, the director of financial markets at OKEx crypto exchange, told Cointelegraph that traders should be wary, as “high OIs alone do not indicate the market is bullish or bearish,” further adding that investors incline toward long strategies: 

“We have recognized that there are a lot more professionals who are leveraging options for hedging their long-only BTC portfolio. And there are lots of more structured products available in the market tailored to professionals for the sake of yield enhancement or exotic payoff.”

With Bitcoin price briefly surpassing the $11,900 mark several times earlier this month, the general interest in cryptocurrencies has been on the rise. Bitcoin has rallied 27% since July 1, which is the highest spike seen in 2020. Bitcoin options are currently trading mainly on Deribit, CME, OKEx and LedgerX, while Bakkt, a crypto exchange owned by major traditional exchange Intercontinental Exchange, sees zero options volumes despite having the product listed. 

BTC Put/Call Ratios

Additionally, the put-call ratio has increased from 0.52 month over month to 0.76 on Aug. 6, which means that a greater proportion of put options were sold as compared to call options. This is a strong indicator of the bullish sentiment that investors currently hold. Lai added to this notion:

“Looking at the growing demand for Bitcoin options, OI and volume, it would seem to suggest that investors are still bullish on Bitcoin price, and with the greater macro factors such as the drop in the U.S. dollar price and an all-time high in gold, the demand for Bitcoin, in general, is rising.”

Ethereum 2.0 and DeFi drive demand

More investors seem to be acquiring ETH exposure using options in 2020. Ether, being the runner up to Bitcoin in the cryptocurrency space, has become one of the main experimental labs for blockchain scalability backed by large institutional and entrepreneurial development communities. Therefore, it’s natural for ETH to become a speculative asset as more decentralized applications are developed. 

Related: Ethereum 2.0 Staking, Explained

The upcoming Ethereum 2.0 proof-of-stake shift for Ethereum and the rapid growth of the DeFi space have proved to be big variables driving the bullish sentiment while adding more credibility to the network. Seeing that Ether options are mainly traded by retail investors, at this point, as they are not traded in regulated exchanges like CME and Bakkt just yet, the growth is further testament of the community’s interest. Strijers elaborated more on the statistics of Ether options and futures traded on Deribit saying:

“The number of use cases for ETH keeps growing, and investors buy into this potential. Deribit ETH options open interest has grown 7x from USD 30–50 million six months ago to USD 350 million now which represents a 90% market share. And while ETH spot prices are peaking, the same applies to ETH futures open interest, which is almost reaching USD 1.5 billion, a new all-time high.”

Posting monthly gains of over 60% and YTD gains surpassing 200%, ETH broke the $400 price mark at the start of August. The impact of the release of Ethereum 2.0’s final PoS testnet “Medalla” and the implications it will have on the DeFi space are now being taken in by the market. Institutional interest has also appeared in the news — like Arca Labs launching an Ethereum-based fund registered with the United States Securities and Exchange Commission. 

Growing the pie?

While Deribit currently occupies the largest market share of the options space, there are new players who have been trying to capitalize on this surge in investor interest. While Strijers welcomed more competition in the space since it would help the pie to grow, there may be certain complexities involved, according to Lai:

“One of the prerequisites of a liquid options market is an equally or even more liquid futures market. Not to mention the complexity of handling the liquidation, mark price and margining, which is far more complicated than delta product-like futures.”

Vinokourov furthered this perspective by comparing the differences in running a crypto derivatives exchange to a spot exchange. He revealed that the main challenges surround maintaining a liquid order book “across a variety of expiries and strike prices, with a matching engine robust enough to withstand sudden bursts of volatility,” in addition to an institutional-grade system to manage risks. He further opined:

“If all that wasn’t enough, client acquisition is that much more difficult than spot equivalent because there are fewer firms that trade these products, and they require institutional-grade client management — something that crypto exchanges are not always able to offer.”

Irrespective of how the options pie is split, arguably, it’s only set to grow even further in size, especially through exchanges like CME now becoming a more prominent player in the space. The bullish sentiment of BTC and ETH will serve to support this growth further by allowing investors more opportunities to speculate.

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