Cryptocurrency derivatives can predict price movements but need institutional enthusiasm to really shine
The crypto derivatives market plays an important role in pricing, but institutional investors need to add more depth.
analysis
The crypto market has been going through a difficult period as the majority of tokens in crypto have seen a price drop since the first week of December, with the leading cryptocurrency Bitcoin (BTC) experiencing a flash crash on December 4th in the price of the token, according to data from Cointelegraph Marketplaces Professional has fallen below $ 50,000 in nearly two months.
This phenomenon has been seen with most of the crypto tokens as the market gradually got into the red. Ethereum and Ether (ETH) became the network and token of choice for most Decentralized Financial Protocols (DeFi) as Ether saw its price drop 19%.
However, BTC and ETH also have healthy options and futures markets that can play a key role in predicting the continued decline in the price of these tokens.
Synonymous with the December 4th price crash, $ 950 million worth of BTC options expired, with the bears outperforming the bulls even at a time when prices were trading at lows. This lead-to-expiration data shows it is skewed towards bearish market forces due to a high percentage of put options below the $ 57,000 mark. A put is a contract that gives the holder of a put option the right (but not the obligation) to sell a predetermined amount of the underlying asset at a predetermined price.
A call is a call option where the option holder has the right to buy the underlying asset on the same terms. The ratio of put to call options that cause the option to expire is a strong indication that sentiment is dominating the market for the underlying asset. In this case, there is a clear sign that even a week before it expires, the market is heavily declining and a price explosion goes hand in hand.
Forces in the game
Luuk Strijers, chief commercial officer of the crypto derivatives exchange Deribit, spoke to Cointelegraph about indications in the derivatives data that indicate an impending crash:
“Before the weekend correction, we saw an increase in IVs, possibly related to sales after the expiration. There seems to be some uncertainty in the market and we’ve seen risk reversal strategies traded (sell OTM, just call + buy OTM set). ”
Since the expiration date of an option is the last day on which the option holder can decide to exercise the option or exercise an order to buy or sell the underlying asset, or the holder decides to forego the option and let it expire, the expiration becomes worthless often become significant events that affect the price dynamics of the underlying asset, in this case Bitcoin.
Strijers examined the impact of this particular process on BTC and said, “It’s hard to say. However, more and more people are looking at the term and the open interest on certain key strokes, which increases the relevance of the larger term. ”
Adam James, Senior Analyst at OKEx Insights, the research arm of the OKEx crypto exchange, spoke to Cointelegraph about the signs that led to this crash: “The clearest signs point to an upswing. Possible problems are extremely high open interest and active capital. These two generally bode well and often require a breakout. He added:
“The ongoing sell-off we saw on Saturday was entirely due to the meager weekend order books which made it easy to be called back for too long and caused some cases of OI resets. As it turned out, the crash was one of the most damaging events in BTC history. “
Although this phenomenon is an indication that the price of the underlying asset and the derivatives market are closely related, the size of the market compared to the size of the trading market is still a big factor.
Institutional investors can be game changers
Considering the derivatives markets that exist for the two leading crypto tokens BTC and ETH – despite a significant increase in open interest – this is a very small percentage of the market, spot and current market capitalization of their assets.
Open Interest (OI) in BTC options has increased more than ten-fold from nearly $ 1 billion on July 1 to around $ 11.4 billion at press time. Open interest hit an all-time high of $ 15.72 billion on October 20. Shortly thereafter, BTC hit an all-time high of $ 68,789.63 on November 10.
When you consider that BTC’s total market cap in the spot markets over the same period is over $ 1 trillion, it’s clear that crypto options are still in their infancy and even close to trading. The same phenomenon can be observed when taking a closer look at the open interest data for ETH.
Cointelegraph discussed the size of the crypto options market with Igneus Terrenus, head of communications at the Bybit crypto derivatives exchange: “If you compare it to the options market in the air, when it comes to commodities or what stocks Robinhood has to offer, what? currently available in the crypto options market, both institutional and retail traders are unlikely to suffice. ”
Institutional investors can be trailblazers in bringing about a drastic change in the crypto derivatives markets by increasing the size, liquidity and depth of those markets exponentially. Goldman Sachs, the investment banking giant that revived its disused crypto trading desk during that bull run, predicts that the crypto options market could be seen as the next frontier for institutional cryptocurrency adoption. The Wall Street bank itself has announced that it will expand its crypto counter to interact with BTC and ETH derivative products.
However, Strijers explains that getting into the crypto derivatives market is a slow process for institutional investors, especially due to the Know Your Customer (KYC) and due diligence process. “In November we attracted more institutional clients than in any previous month – the bigger the company, the longer the referral process takes,” he said. He added:
“Now these large clients also have an expanded platform and due diligence process, especially those that provide third-party asset management services such as multi-billion dollar macro funds.”
Other altcoins are playing to catch up
There is currently a liquid options market that only exists for BTC and ETH on various crypto exchanges such as Deribit, LedgerX, OKEx, FTX and even the Chicago Mercantile Exchange (CME), the exchange, the world’s largest derivatives for traditional asset classes.
However, options products are not available for other well-known crypto tokens such as XRP (XRP), Solana (SOL), Binance Coin (BNB), Polkadot (DOT) and many more, although these tokens have a highly liquid spot market and even a futures market.
Strijers further explains the reasons for this current scenario: “We plan to ship SOL products soon. Additionally, it is still assumed that we will need adequate market maker coverage at all times, including, for example, Sunday nights and other times, during all strikes and expiration times. We cannot rely on a handful of market makers, we need more. ”
Related: Cryptocurrency Derivatives Market Growing Despite Regulatory FUD
However, there is also a liquid futures market for some of the top cryptocurrencies, even including the Dogecoin (DOGE) meme coin and the game’s native token, regardless of the Axie Infinity (AXS) token (NFT). Even so, the OI of these token futures-based products hasn’t even reached $ 1 billion, despite the fact that the market has completed one of the longest bull runs the ecosystem has ever seen.
The token with the highest open interest for its futures is alongside BTC and ETH SOL, which is nearly $ 870 million at the time of going to press. Next up on the rankings is DOT with an OI of $ 573 million, followed by BNB with an OI of $ 521 million.
Given that all of these altcoins have a spot market capitalization of over $ 50 billion, the futures market for these tokens currently only represents a small percentage of their total market capitalization. This suggests that while there is a liquid futures market for these assets, the size is too small to have a significant impact on the price, even though they play a role in determining the price of the underlying token.
Since the acceptance of cryptocurrencies in the institutional and private sectors is said to have skyrocketed over the past year, their involvement in the derivatives side of the market will also increase over time, especially as the institutional giants like Grayscale spring up and participate heavily in the market that are driving this market forward and the effective pricing for these assets.
Author
Bitcoin
Cryptocurrency derivatives can predict price movements but need institutional enthusiasm to really shine
The crypto derivatives market plays an important role in pricing, but institutional investors need to add more depth.
analysis
The crypto market has been going through a difficult period as the majority of tokens in crypto have seen a price drop since the first week of December, with the leading cryptocurrency Bitcoin (BTC) experiencing a flash crash on December 4th in the price of the token, according to data from Cointelegraph Marketplaces Professional has fallen below $ 50,000 in nearly two months.
This phenomenon has been seen with most of the crypto tokens as the market gradually got into the red. Ethereum and Ether (ETH) became the network and token of choice for most Decentralized Financial Protocols (DeFi) as Ether saw its price drop 19%.
However, BTC and ETH also have healthy options and futures markets that can play a key role in predicting the continued decline in the price of these tokens.
Synonymous with the December 4th price crash, $ 950 million worth of BTC options expired, with the bears outperforming the bulls even at a time when prices were trading at lows. This lead-to-expiration data shows it is skewed towards bearish market forces due to a high percentage of put options below the $ 57,000 mark. A put is a contract that gives the holder of a put option the right (but not the obligation) to sell a predetermined amount of the underlying asset at a predetermined price.
A call is a call option where the option holder has the right to buy the underlying asset on the same terms. The ratio of put to call options that cause the option to expire is a strong indication that sentiment is dominating the market for the underlying asset. In this case, there is a clear sign that even a week before it expires, the market is heavily declining and a price explosion goes hand in hand.
Forces in the game
Luuk Strijers, chief commercial officer of the crypto derivatives exchange Deribit, spoke to Cointelegraph about indications in the derivatives data that indicate an impending crash:
“Before the weekend correction, we saw an increase in IVs, possibly related to sales after the expiration. There seems to be some uncertainty in the market and we’ve seen risk reversal strategies traded (sell OTM, just call + buy OTM set). ”
Since the expiration date of an option is the last day on which the option holder can decide to exercise the option or exercise an order to buy or sell the underlying asset, or the holder decides to forego the option and let it expire, the expiration becomes worthless often become significant events that affect the price dynamics of the underlying asset, in this case Bitcoin.
Strijers examined the impact of this particular process on BTC and said, “It’s hard to say. However, more and more people are looking at the term and the open interest on certain key strokes, which increases the relevance of the larger term. ”
Adam James, Senior Analyst at OKEx Insights, the research arm of the OKEx crypto exchange, spoke to Cointelegraph about the signs that led to this crash: “The clearest signs point to an upswing. Possible problems are extremely high open interest and active capital. These two generally bode well and often require a breakout. He added:
“The ongoing sell-off we saw on Saturday was entirely due to the meager weekend order books which made it easy to be called back for too long and caused some cases of OI resets. As it turned out, the crash was one of the most damaging events in BTC history. “
Although this phenomenon is an indication that the price of the underlying asset and the derivatives market are closely related, the size of the market compared to the size of the trading market is still a big factor.
Institutional investors can be game changers
Considering the derivatives markets that exist for the two leading crypto tokens BTC and ETH – despite a significant increase in open interest – this is a very small percentage of the market, spot and current market capitalization of their assets.
Open Interest (OI) in BTC options has increased more than ten-fold from nearly $ 1 billion on July 1 to around $ 11.4 billion at press time. Open interest hit an all-time high of $ 15.72 billion on October 20. Shortly thereafter, BTC hit an all-time high of $ 68,789.63 on November 10.
When you consider that BTC’s total market cap in the spot markets over the same period is over $ 1 trillion, it’s clear that crypto options are still in their infancy and even close to trading. The same phenomenon can be observed when taking a closer look at the open interest data for ETH.
Cointelegraph discussed the size of the crypto options market with Igneus Terrenus, head of communications at the Bybit crypto derivatives exchange: “If you compare it to the options market in the air, when it comes to commodities or what stocks Robinhood has to offer, what? currently available in the crypto options market, both institutional and retail traders are unlikely to suffice. ”
Institutional investors can be trailblazers in bringing about a drastic change in the crypto derivatives markets by increasing the size, liquidity and depth of those markets exponentially. Goldman Sachs, the investment banking giant that revived its disused crypto trading desk during that bull run, predicts that the crypto options market could be seen as the next frontier for institutional cryptocurrency adoption. The Wall Street bank itself has announced that it will expand its crypto counter to interact with BTC and ETH derivative products.
However, Strijers explains that getting into the crypto derivatives market is a slow process for institutional investors, especially due to the Know Your Customer (KYC) and due diligence process. “In November we attracted more institutional clients than in any previous month – the bigger the company, the longer the referral process takes,” he said. He added:
“Now these large clients also have an expanded platform and due diligence process, especially those that provide third-party asset management services such as multi-billion dollar macro funds.”
Other altcoins are playing to catch up
There is currently a liquid options market that only exists for BTC and ETH on various crypto exchanges such as Deribit, LedgerX, OKEx, FTX and even the Chicago Mercantile Exchange (CME), the exchange, the world’s largest derivatives for traditional asset classes.
However, options products are not available for other well-known crypto tokens such as XRP (XRP), Solana (SOL), Binance Coin (BNB), Polkadot (DOT) and many more, although these tokens have a highly liquid spot market and even a futures market.
Strijers further explains the reasons for this current scenario: “We plan to ship SOL products soon. Additionally, it is still assumed that we will need adequate market maker coverage at all times, including, for example, Sunday nights and other times, during all strikes and expiration times. We cannot rely on a handful of market makers, we need more. ”
Related: Cryptocurrency Derivatives Market Growing Despite Regulatory FUD
However, there is also a liquid futures market for some of the top cryptocurrencies, even including the Dogecoin (DOGE) meme coin and the game’s native token, regardless of the Axie Infinity (AXS) token (NFT). Even so, the OI of these token futures-based products hasn’t even reached $ 1 billion, despite the fact that the market has completed one of the longest bull runs the ecosystem has ever seen.
The token with the highest open interest for its futures is alongside BTC and ETH SOL, which is nearly $ 870 million at the time of going to press. Next up on the rankings is DOT with an OI of $ 573 million, followed by BNB with an OI of $ 521 million.
Given that all of these altcoins have a spot market capitalization of over $ 50 billion, the futures market for these tokens currently only represents a small percentage of their total market capitalization. This suggests that while there is a liquid futures market for these assets, the size is too small to have a significant impact on the price, even though they play a role in determining the price of the underlying token.
Since the acceptance of cryptocurrencies in the institutional and private sectors is said to have skyrocketed over the past year, their involvement in the derivatives side of the market will also increase over time, especially as the institutional giants like Grayscale spring up and participate heavily in the market that are driving this market forward and the effective pricing for these assets.
Other Posts
Related Posts
