The rise of institutional investors and the growth of the crypto derivatives market are mutually reinforcing and indicate a sign of maturation in the industry. Derivatives provide an important building block for efficient market participation, particularly for institutional investors, offering more liquid trading instruments and allowing traders to express their positions more granularly than in spot markets.
The increasing participation of institutional investors and the growth of the crypto derivatives market are mutually reinforcing and indicate maturation. Derivatives are an important building block for efficient market participation and are of particular importance to institutional investors.
Derivatives offer a more liquid trading instrument that frequently allows positions with up to 100x or even more in leverage. Together with sophisticated takeprofit and stop-loss parameters, they allow traders a much more granular expression of their positions compared to spot markets. Liquidity in derivatives is five to 10 times that of spot markets on any given day, depending on what type of derivative and what type of digital asset is considered, according to The Block.
Digital asset derivatives come in the form of futures and options, for the most part. More advanced constructs have included non-deliverable forwards, which is a money market instrument. Some crypto native derivatives have also been developed. Squeeth is one such example and offers perpetual swaps following the price of ETH squared. We will discuss futures and options here.
Digital asset derivatives have some notable differences from their traditional counterparts. One main difference is market opening times. The Chicago Mercantile Exchange (CME) closes on weekends and for a quarter hour every day, whereas other crypto exchanges offer derivatives trading 24/7. The CME also issues futures on Bitcoin, which are available for trading only during market opening times.
Since crypto exchanges like Binance are not subject to the same level of regulatory scrutiny as the CME and other traditional issuers of financial instruments, the exact legal underpinnings of digital asset derivatives are somewhat vague until regulators close the gap.
Despite the benefits of digital asset derivatives, there are notable differences from their traditional counterparts, including market opening times and regulatory scrutiny. While crypto exchanges like Binance offer 24/7 trading, the exact legal underpinnings of digital asset derivatives remain somewhat vague until regulators close the gap. Nonetheless, the continued participation of institutional investors and the growth of the crypto derivatives market suggest continued maturation of the industry.
This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.