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The world of cryptocurrency trading is rapidly expanding into derivatives, with the aim of attracting cautious investors to the market through tougher regulations and the promise of high leveraged returns.
In the coming months, Dutch crypto futures and options platform D2X will be launched, while London-based One Trading and GFO-X are both planning to enter the market early next year.
These new players will be joining other derivatives platforms such as Kraken in the US, which recently launched a venue in Bermuda, in competing against established leaders like CME Group, Binance, and Bybit for a share of the growing market.
Bitcoin’s price has surged by over 50% this year, reaching more than $67,000, and derivatives are becoming increasingly central to the digital assets market.
According to CCData, trading in futures and options now represents 71% of all digital asset trading volumes, with open interest in crypto derivatives surpassing $40 billion for the first time this year.
For many traders, the appeal of derivatives lies in the ability to leverage their investments, especially in a market where traditional lending options have been limited since the 2022 crash.
Large lenders like Genesis, BlockFi, and Celsius, which used to provide credit to investors, have collapsed and have not been replaced on a similar scale.
Jason Urban, the global head of trading at Galaxy Digital, stated, “Derivatives offer leverage.” He added that since the decline of many crypto lenders, traders have been looking for alternative ways to gain leverage.
Derivatives enable traders to gain exposure to cryptocurrencies like bitcoin and ether by only putting up a fraction of the total cost of buying the actual tokens. Platforms like Bybit and Kraken allow investors to borrow up to 125 times and 50 times, respectively, their original investment.
As the price of bitcoin continues to rise and the introduction of spot bitcoin and ether exchange-traded funds attracts new investors, exchanges are increasingly focusing on expanding their derivatives offerings.
Nico Cordeiro, the chief investment officer at US crypto hedge fund Strix Leviathan, noted that major US exchanges are actively seeking to increase trading volumes by introducing new products and features to attract traders. He emphasized the significance of being a regulated exchange in the current market.
The leading player in the derivatives market, Chicago’s CME Group, has seen record trading volumes and open interest this year, as investors are drawn to its regulated platform. The exchange has introduced new derivatives contracts, including Bitcoin Friday futures, to cater to the growing demand.
Traders have also been turning to derivatives because in the spot market, transactions must be paid for in advance, leaving traders vulnerable if deals go sour and depleting their trading resources quickly.
Cordeiro highlighted the appeal of CME’s platform, stating that it provides a level of capital efficiency that is attractive to regulated investment managers in the US.
Many investors have opted to trade derivatives instead of the underlying tokens due to concerns about regulatory scrutiny, with the Securities and Exchange Commission cracking down on companies offering unregistered securities. However, the regulator recently approved options on bitcoin ETFs.
As a result, new platforms targeting institutional traders are emphasizing their compliance with regulations to instill confidence in investors.
Josh Barraclough, the CEO of One Trading, highlighted their regulatory compliance in Europe, stating that they are the only venue in the region offering perpetual futures to both retail and institutional customers.
Similarly, Nasdaq-listed Coinbase is finalizing a deal to acquire a Cyprus-based entity with an EU regulatory license, allowing them to launch regulated crypto derivatives in the European Union.