Annual transaction volumes in cryptocurrency derivatives have topped US$15 to US$20 billion, despite the fact that returns from crypto derivatives are still in the early stages.
Cryptocurrency derivatives, which allow investors to bet on the volatility of Bitcoin prices without having to own the underlying cryptocurrency, is becoming increasingly popular among investors. Because of the ProShares Bitcoin Strategy ETF, or BITO, the volume and open interest in bitcoin futures have risen dramatically since its launch
The number of Bitcoin futures exchange-traded funds that have been registered with the Securities and Exchange Commission serves as an excellent illustration. As federal regulatory scrutiny of cryptocurrency derivatives rises, exchange-traded crypto derivatives, such as bitcoin and ether futures and options, are in great demand, particularly among institutional investors.
An index price that depicts the price of Bitcoin as measured on cryptocurrency exchanges is connected to the movements of a perpetual swap contract, which is a relatively new cryptocurrency derivative.
According to Skew data the volume of Bitcoin options has increased as well, with open interest on cryptocurrency exchanges reaching a notional value of US$12 billion, a significant increase from the previous year.
This is small when compared to the value of the derivatives market, which is estimated to be worth more than US$1 quadrillion. Based on data from the Bank of International Settlements, the OTC derivatives market alone was worth $15 trillion in the first half of 2020, according to the bank. Crypto derivatives markets are experiencing a different kind of boom as a result of the increasing demand for clear regulation among institutional and financial customers.
As hedge funds and other buy-side clients become more interested in digital assets as a potential alternative investment, investment banks have become increasingly interested in building crypto derivatives trading desks to service their needs. Goldman Sachs was one of the first investment banks to establish a cryptocurrency desk, and it is believed that other institutions will follow suit. The most frequently encountered charges associated with derivatives trading are central clearing, margin, and bank capital costs. For banks, the revenue from derivatives has decreased consistently over the years: they accounted for 60 to 80 percent of total consolidated trading income in 2008, but are currently between 30 and 50 percent this year.
The successful introduction of Bitcoin futures exchange-traded funds (ETFs) has prepared the way for a considerable expansion in the use of cryptocurrency derivatives.
Given the early stage of the cryptocurrency sector and the fact that crypto derivatives account for a small fraction of total global derivatives outstanding, the size of the crypto derivatives market has the potential to increase.