Rising demand for derivatives is fueling Bitcoin’s resurgence

The forces that have rekindled crypto prices have also sparked activity in the derivatives market for digital assets.

Open interest in Bitcoin options has skyrocketed, with the number of contracts rising to a record high in recent days, according to data from derivatives exchange Deribit.

Put another way, there has also been a “stunning increase” in Bitcoin open interest as measured in Bitcoin itself, according to Coinglass data compiled by Noelle Acheson, author of the “Crypto Is Macro Now” newsletter.

Meanwhile, options volumes have also increased, with some traders seeing it as a sign that new entrants may enter the market.

All told, derivatives trading volumes currently account for more than 60% of the overall total – including spot – across crypto exchanges, according to CryptoCompare.

It’s all happening as the digital asset market is seeing renewed interest among a handful of banks in the traditional financial space.

Bitcoin, the largest token, is up about 70% so far this year to trade around $28,600 as of 12:37 p.m. in New York.

“The options market has absolutely exploded with demand and interest in these moves,” said Chris Newhouse, a crypto derivatives trader at crypto investment firm GSR.

“It really looks like other big players have started to enter the options markets.”

Coming off the start of the year, crypto prices have rallied again in recent weeks amid turmoil in the US and European financial sectors, which saw the collapse of three US banks and led to the takeover of Credit Suisse by UBS over the weekend.

Proponents of digital assets say their industry is benefiting as investors realize tokens are beyond the reach of governments and are far removed from all the problems that arise with different lenders.

Options volume has picked up recently, especially as traders expect high market volatility amid the banking crisis, said Luuk Strijers, commercial director at Deribit.

“Talking to customers in November and December was about protection and trust and security,” he said. “And now it’s about opportunities. People are coming back” to trade derivatives.

And there are signs that participants in the new options are taking more bullish positions, Acheson said. There is currently a high demand for calls.

“Traders are coming back to the market with significant volumes – the combination of cheap options and possibly sharp price movements – which we see – is a strong opportunity for any trader, not just crypto traders,” she said.

Crypto derivative products tend to be super popular among investors.

In recent months, some crypto firms have looked to build new derivatives exchanges to fill a gap left by FTX, which imploded at the end of last year.

Meanwhile, the demise of some crypto lenders, including Genesis, has left some traders looking for other ways to leverage their positions. Genesis says its trading business continues to perform well.

“If you look at the stock markets as a guide, the derivatives market is multiples larger than the spot market. It makes sense that the same trend will play out in crypto,” said Marc Weinstein, partner at Mechanism Capital, which invests in a few derivatives exchanges.

“As the infrastructure has improved, the size of derivatives is growing both on and off the chain.”

Meanwhile, with the drop in both volume and liquidity, it has become very difficult to take short positions in the spot market, according to David Martin, head of institutional coverage at digital-asset prime brokerage FalconX.

Derivatives have quickly become a popular market for institutional traders to go long and short, express their views on the market as well as hedge their portfolio.

Some investors created an “artificial stable coin” by taking a short position in the derivatives market while continuing to own Bitcoin, according to Antonio Juliano, founder and CEO of decentralized exchange dYdX.

“If you do that, you actually have a stable asset that at least has a different risk profile than a stablecoin that has a few dollars in the bank,” he said. “It’s a pretty good example of how derivatives have been used for hedging.”