Crypto derivatives are coming to America
The American cryptocurrency industry has set its sights on a new, far more lucrative target than bitcoin: It is chasing crypto derivatives.
Although they have technically been available for a couple of years, they remain strictly limited and very limited than the rest of the world. But two of the biggest exchanges, FTX and Coinbase, are making a big push to bring the US into the biggest part of the global crypto market. And they are not alone.
Other players come to crypto from the traditional futures side. Cboe – the Chicago Board Options Exchange – acquired the first licensed crypto futures exchange, ErisX, earlier this year. CME Group, owner of the Chicago Mercantile Exchange, has held the longest since 2019. Bakkt, part of New York Stock Exchange owner Intercontinental Exchange (ICE), launched bitcoin futures in December 2021.
The global market for crypto derivatives accounts for approximately 70% of all crypto trading. In July, crypto derivatives were a $3.12 trillion market, while spot crypto trading was about $1.3 trillion, Reuters reported this month. Very little of it comes from the US
It looks like that is about to change, and the transformation it could bring to the US crypto market is extraordinary. First, much of the political flak directed at spot crypto trading—the direct buying and selling of cryptocurrencies like bitcoin—is about the need to protect retail investors from a highly volatile and risky market.
The advent of crypto derivatives, with large margins available to magnify the size and speed of gains and losses, will turn it up a notch. And remember, it wasn’t that many years ago when some of the top exchanges even offered spot trade margins up to 100x.
Standing up
Sam Bankman-Fried, CEO of FTX and the much smaller FTX.US, said in an interview with Decrypt on August 19 that the purchase of LedgerX, one of the relatively few firms licensed by the Commodity Futures Trading Commission (CFTC) to trading bitcoin and ether derivatives last October was “one of the most important things we did.”
Crypto derivatives are “the single biggest question from our clients for as long as I can remember,” and the company now called FTX US Derivatives “remains probably the single thing I’m most focused on right now,” Bankman-Fried said.
You don’t need to look beyond FTX’s trading volume to see why. On Friday (August 26), FTX’s spot exchange volume was $2.3 billion. Derivatives volume was $8.47 billion. On the largest global cryptocurrency exchange, Binance, spot exchange volume and derivative volume were $20.5 billion and $70.4 billion, respectively.
Then there is Coinbase, which on August 26 had $2.4 billion in spot trading and zero in derivatives.
A day earlier, the company announced that the Coinbase Derivatives Exchange would begin selling a second derivative, nano-ether futures contracts (10% of an ether, about $150 at press time) alongside its nano-bitcoin futures contracts (1% of a bitcoin, about $205).
If that makes it sound like Coinbase is very new to the game, that’s because it is. The Bitcoin futures contracts were launched on June 27. It acquired CFTC-licensed FairX in January. That said, the CFTC has only allowed very limited, physically settled trading in crypto derivatives – which are settled in crypto instead of dollars.
The SEC jumps in
It is a safer version of crypto futures for sale in the form of exchange-traded funds (ETFs). Under Chairman Gary Gensler, the Securities and Exchange Commission (SEC) has green-lighted a handful of bitcoin futures ETFs, while steadfastly refusing to license any spot bitcoin ETFs over market manipulation concerns. He’s been pretty clear that that’s not going to change anytime soon.
And the CFTC has been very sparing with its approvals, allowing only bitcoin and ether contracts. But the major exchanges are lining up derivatives offerings just as Congress is getting serious about building crypto a regulatory framework. When that happens, many more derivatives such as options and swaps may become available on many more cryptocurrencies.
If it does, it will mark a change for the US crypto industry, with a lot more money flowing in that can be directed towards lobbying. And much hotter fire for inexperienced investors to burn themselves on, which could be bad for crypto’s reputation in a whole new way.
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