The growth of the cryptocurrency derivatives market in 2020 was a story of its own, largely driven by options for Bitcoin (BTC) and Ether (ETH) traded on exchanges such as the Chicago Mercantile Exchange, Deribit, OKEx, Binance and Houbi.
Record volumes of Bitcoin options indicate growing institutional interest in cryptocurrencies, but there are better quantitative and qualitative indicators like open interest, Bitcoin price, frequency of block trades, and institutional processes to your customers and others.
Compared to traditional derivatives, the share of institutional investors across the group is still small, but it is clear that the final surge in interest is due to financial instruments such as options and futures. Options are not a panacea, but a stage in the development of an asset, and as is evident, Bitcoin and Ether have reached this point in their development. Speaking to Cointelegraph, Luuk Strijers, commercial director of the cryptocurrency derivatives exchange Deribit, repeated similar ideas and explained that “the inflow of money from institutional investors in crypto is still very low”, adding:
However, there are several indicators that indicate the gradual introduction of cryptocurrencies or BTC in institutional portfolios. Traditional funding tends to prefer traditional instruments such as options and futures, volume and open interest in these instruments, which are clear indicators of potentially growing institutional demand. “
Volumes can be difficult
Taking only the reported volumes of Bitcoin and Ether into account could be misleading for both investors and speculators, as the volume of derivatives is often manipulated by bots, money laundering, and misreporting. A better indicator of volume would be the amount of BTC that goes in and out of derivatives exchanges like Deribit. These analyzes are provided by various companies that extract information from the data in the chain.
After Bitcoin’s options volume increased 1,000% in May, derivatives volumes decreased 35.7% in June to $ 393 billion. However, the total volume of options for Bitcoin options at CME set a new monthly record and rose by 41% with 8,444 contracts traded. Cointelegraph confirmed this increase with a CME spokesman who provided information about the open interest in BTC options and said: “In June, CME’s bitcoin options had a record 12 consecutive OI days, which resulted in a record 9,858 contracts (equivalent to 49,290 bitcoins) on June 26.”
Open interest: a better indicator than volume?
While the increase in volume indicates an increase in public and institutional interest in cryptocurrencies trying to hedge volatility and asset protection during the COVID-19 pandemic and looming global financial crisisOpen interest is a better indicator of institutional interest because it means buying interest and it is not a faulty metric to make this distinction as the volume reported would be. The CME spokesman agreed and said:
“In our CME Bitcoin futures market, the number of large open interest holders (LOIH) or traders with 25 or more contracts rose to an average of 65 LOIH in the second quarter of 2020. This is an increase of 27% compared to the first quarter and a New record. Large open interest holders are great traders in terms of the CFTC and can therefore be another indicator of institutional participation. “
Block trading are privately traded futures / options contracts that meet certain volume thresholds and are usually executed outside the public auction market. Since institutional investors and traders generally work with higher budgets, the percentage of block transactions within the total volume could also serve as an indicator of institutional interest in cryptocurrencies. The CME spokesman further confirmed this hypothesis:
Block trading in CME bitcoin options has grown steadily since its introduction in January 2020: blocks accounted for 79% of the total CME bitcoin option volume in June, compared to 22% in April. It is worth noting that the minimum block trade size for CME Bitcoin futures and options is 5 contracts (equivalent to 25 Bitcoin). A larger block trade could therefore indicate stronger institutional participation. “
To learn more about the phenomenon of block trading between exclusive cryptocurrency exchanges, it is important to consider deribit as it is the largest platform for these instruments. In June, The highest quarterly expiration date to date was 115,000 expired contracts, of which Derebit held 74,000. Deribit’s strijers explained more about the relevance of open interest and block trading and revealed:
“The total open interest in the BTC options market was just under $ 2 billion. This is another record and confirmation of the customer’s interest in the asset class. We also see an increase in the relative number of BTC option block transactions from an average of 6 to 8 % per month to almost 12% of the June 2020 volume. “
BTC price and volatility
At the end of the second quarter, BTC volatility had dropped significantly, which in itself is a lucrative sign of institutional participation as institutions prefer stability. In comparison, retail markets often see abrupt changes. According to Jay Hao, CEO of OKEx, a Malta-based cryptocurrency exchange, stability is a sign that “Bitcoin is maturing as an asset class” and added in a conversation with Cointelegraph:
“”When institutional traders became interested in BTC, volatility was a red flag that kept many away. However, given the current outlook, we currently see higher volatility in traditional markets. This could be another reason for the new interest from traders who want to diversify their portfolios and ultimately want to see Bitcoin as a viable option for final hedging with a sophisticated derivatives market and options trading. “
It is important to note that the reduced volatility in the Bitcoin price alone is not enough to draw conclusions about the extent of institutional engagement. John Todaro, research director at TradeBlock, one of the largest digital currency platforms for trading executions, told Cointelegraph: “Bitcoin has reduced volatility in the past before wild market changes again. 2018 is a good one.” Year to see that. “Lower volatility alone would therefore not mean institutional participation.”
More recently, Bitcoin’s price has shown a correlation with the SP 500, which can be seen as a representative index for the global stock market. Todaro explained more about what this means for institutional interest:
“The moderate to strong correlation between stocks and Bitcoin in the past few months has been a good example of the growing institutional interest. Large trading companies tend to shift assets in positive or negative correlation directions, which we saw recently between Bitcoin and stocks. In the past, Bitcoin has behaved uncorrelated, which suggests a complete divorce from traditional financial markets. “
Bitcoin exchange traded funds are derivative products that are traded in whole or in part with Bitcoin as an underlying. Once the Securities and Exchange Commission approves Bitcoin ETFs, they are expected to grow huge. This is a turning point in the life cycle of BTC as an asset class and is likely to drive retail demand and penetration, as Todaro revealed: “In my opinion, a Bitcoin ETF would actually increase retail business, as ETFs often target more retailers than traders as a mere exposure.”
Not only would this attract more private investors, it would also be an incentive for institutions to deal with an investment vehicle with which they are very familiar. The SEC seal of approval alleviates institutional concerns about the disclosure of their customers. to unregulated markets. Hao from OKEx explained this:
“Everyone in this area has been waiting for approval of a Bitcoin ETF for a long time, as this will undoubtedly increase the demand from the institutions as they can give their customers the opportunity to use Bitcoin without owning it or negotiating with exchanges.” . You can greatly diversify your holdings without exposing yourself to many risks from trading and owning BTC. “
The giants start to appear
The grayscale bitcoin trust has become a force to be reckoned with, managing record amounts of money and with institutions that make up 88% of its investors. In addition, traditional players like the four big accounting firms are entering the crypto market, and even Western Union is betting. This change can also be followed on platforms like TradeBlock, as Todaro later explained: “We have seen considerable interest from new and existing institutional investment traders / companies as they grow in the crypto space.”
Strijers confirmed that this interest can also be seen at Deribit. As the company tracks its institutional KYC metrics, it does not publish this information. Strijers continued: “The number of companies we work for is growing month by month, as is the number of new requests to develop services specifically for funds or asset managers.”
The latest news that With PayPal, Bitcoin payments can give the space more credibility. And given a robust and dynamic derivatives market and unprecedented uncertainty in traditional markets, this interest is likely to only increase.