Shares in Coinbase rose by 1.2% on January 12 after the company announced it had acquired FairX, a newcomer futures exchange regulated by the US Commodity Futures Trading Commission. It represents a late move on the part of the US trading giant. Competitors FTX, Binance, and Kraken were all in the crypto derivatives market by 2019.
Even so, a late entry doesn’t mean there’s nothing left on the table. The cryptocurrency derivatives markets have undergone rapid exponential growth over recent years. As Bitcoin rose to new all-time highs in October 2021, the aggregated open interest of Bitcoin futures hit its own peak above $28 billion, up 600% from the previous year. The options market, while slightly less established than futures, is on a similar trajectory.
A Developing Market
Why are traders flocking into cryptocurrency derivatives? Because they allow traders to gain exposure to Bitcoin with high leverage, magnifying the potential returns. Given crypto’s notorious volatility, those who can time the market right have a chance to make substantial profits.
However, leverage comes with risk. If a trader ends up on the losing side of a transaction, they can stand for losses much higher than their initial stake. To hedge against this risk, many traders use options.
While a futures contract obliges someone to close the transaction at the expiry, an options contract gives them the option to close it, but without obligation, by paying a premium. So traders use sophisticated strategies to build portfolios of derivatives that hedge their overall risk positions.
So when unregulated cryptocurrency futures first arrived on the scene courtesy of BitMEX in 2014, they were attractive enough to high-stakes retail traders but too risky for institutions. Even once the CME and Cboe launched their first bitcoin-backed futures products in December 2017, the reception from institutional traders was lukewarm. So much so, that Cboe pulled its own offering a little over a year later.
Institutions Move In
Deribit was the first to market with cryptocurrency-backed options, but once others began to follow, it acted as a catalyst for the overall growth of crypto derivatives. However, this is a market that’s just getting started, and experts are forecasting that there’s plenty of growth still ahead - particularly in the institutional segment.
It’s a gap that leading crypto exchange AAX is rising to meet, positioning itself for substantial further growth in 2022. AAX is the first-ever digital asset exchange to be powered by LSEG Technology’s Millennium Exchange, the same matching engine driving tier-one capital markets. Launched in 2019 and registered in the Seychelles, it’s also the first of its kind to have joined the London Stock Exchange Group’s Partner Platform.
Along with over 50 crypto pairs, AAX also offers a large selection of perpetual futures contracts backed by BTC, ETH, LTC, XRP, DOT, and other top-performing altcoins. Users can benefit from high leverage of up to 100x for trading on secure, highly liquid markets. Fees are also low, with only a 0.1% taker fee which can be reduced to as little as 0.064% by paying with the platform’s native AAB token.
While AAX aims to appeal to a broad base of professional and retail and institution-ready platforms, it also aims to appeal to a broad base of professional and retail cryptocurrency users with its broad range of subsidiary services, including DeFi liquidity mining and yield-generating savings schemes.
DeFi - A New Frontier
The decentralized derivatives market is even more nascent than the centralized one but offers vast potential. Early entrants such as dYdX, Synthetix, and Mirror Protocol blazed a trail by offering token-based products designed to track the performance of all kinds of assets, including cryptocurrencies, fiat currencies, and even real-world stocks.
However, like their centralized counterparts, they come with the limitation that users can only trade the range of products on offer. If a new, up-and-coming token emerges and a user wishes to trade derivatives of that token, they must wait until an existing derivatives DEX lists it, which may involve going through community governance.
SynFutures offers a unique selling point compared to the competition – user-generated markets. Anyone can list any trading pair in a matter of seconds, any project can create its own futures market margined in project tokens.
Like many decentralized exchanges, SynFutures uses automated market makers to ensure a continuous supply of liquidity. However, due to its offering as a futures exchange and not a token swapping service, it operates a single token model allowing users to provide liquidity with only one asset.
SynFutures also offers a unique feature called “NFTures,” allowing users to take out leveraged long or short positions against NFTs, allowing them to speculate on the markets without having to actually own NFTs. Considering the markets can often be relatively illiquid, this represents a significant opportunity.
While there’s only a limited audience for high-stakes retail futures trading, AAX and SynFutures are both primed to capitalize on the two biggest growth areas in crypto derivatives in 2022 – institutions and decentralized trading. However, we can expect this market expansion to continue for the coming years as digital assets and derivatives products continue to cement their place in the world’s capital markets.
