The future of crypto trading is futures

Boundaries between cryptocurrencies and traditional asset classes are becoming increasingly blurred as established Wall Street players make digital asset trading part of their core business, and bitcoin-origin companies push into major markets.

The influx of institutional investors into the $ 1.3 trillion digital asset market has increased the influence of large banks and professional traders. As a result, the relationship between the price of major assets, such as stocks and bonds, and cryptography has narrowed.

But so far, most of these established investors can only trade bitcoin derivatives, rather than cash contracts, which has focused Wall Street’s influence on futures markets and OTC contracts, as ‘undeliverable forward’.

And this focus on derivatives has intensified competition in exchanges for a growing share of the world of digital assets.

The influence of professional traders in the market is already noticeable, says Adam Farthing, head of risk for Japan at the market maker specializing in B2C2 cryptocurrencies.

In recent weeks, cryptocurrency markets have had one of their biggest shocks ever after Tether, a leading stable currency that should be valued in line with the US dollar, broke its link to the currency. This has sent reverberations into digital asset markets, eliminating billions of dollars in trading positions.

Bitcoin and ethereum, the two largest cryptocurrency tokens by market value, have recorded double-digit losses since the beginning of the month.

However, Farthing points out that price changes have been much quieter in cryptocurrency futures than elsewhere, and dislocations between stock exchanges, which can lead to arbitrage opportunities, have been smaller than in previous episodes of market turbulence.

“With all the fatality surrounding crypto markets, it’s worth noting that futures markets are behaving more and more maturely,” says Farthing.

Recent volatility has also taken the trading of cryptocurrency futures on the Chicago Mercantile Exchange (CME) to an all-time high, as professional traders seek to limit their trading of digital assets to a highly regulated market.

But retailers trade even higher volumes of futures contracts a day on offshore exchanges, which are less strictly regulated. These include FTX, Binance and OKex.

Derivatives, such as futures and options, are attractive as they allow investors to bet on price movements within a pre-agreed timeframe, while only reducing a small fraction of the value of their pre-trading transactions. However, this ability to take advantage of operations amplifies the outcome, which means that the scale of potential losses is much larger.

For highly regulated institutions such as banks, futures are also easier to manage from a credit, compliance and legal standpoint because they do not involve the physical delivery of the underlying asset.

With these advantages now fueling a more professional cryptocurrency futures trade, exchanges are racing to become the largest in this market.

Competition between exchanges for a share of the digital currency market has become fiercer than ever, although cryptocurrency markets are experiencing one of their biggest collapses and growing fears that a prolonged period of low activity could affect trading revenues.

“While there is no such strict limit on the number of trades the cryptocurrency market can support, it is likely that some major players will emerge over time,” predicts Nicky Maan, CEO of Spectrum Markets, which offers securitized cryptocurrency derivatives. to investors.

“I hope we see significant growth [on exchanges] compared to OTC in the next five years, ”he adds.

Traditional exchanges are also eager to get a share of the lucrative cryptocurrency trading market, as they have spent years seeing their startup partners in digital assets reap attractive rewards.

Cboe and CME were the first to launch futures contracts on bitcoins in 2017. Now, the Swiss GIS exchange and Eurex also offer types of derivatives.

Traditional exchanges have spent years seeing their digital startup partners pick up rewards © Christopher Dilts / Bloomberg

At the same time, specialized cryptocurrency exchanges are slowly entering the highly regulated U.S. derivatives markets. They do this in part to satisfy demanding retail customers, who want to trade products and contracts in all markets. But major cryptocurrency exchanges also have a half eye to enter traditional professional markets.

In recent months, several cryptographic exchanges have made acquisitions of small traditional exchanges, to accelerate their momentum in conventional markets, especially in derivatives.

New cryptographic exchanges are also making inroads. There are now 526 cryptocurrency exchanges, according to coinmarketcap, a data site, and some recent entrants have been gaining momentum, especially those aimed at professional investors. Bullish, the platform backed by multi-billionaire hedge fund owners, has had a promising start since late last year.

“We launched Bullish at Christmas time and today we have more than $ 2 billion in trading volumes in bitcoins, the same amount as Coinbase,” says Tom Farley, executive director of Bullish’s special purpose vehicle, which will be used to float in the stock market. values. at the end of this year.

And some of the ideas that cryptographic exchanges are bringing to traditional markets are innovative. One is 24-hour trading, seven days a week, a schedule that is normal for computerized digital markets, but alien even to forex trading, which only operates five days a week.

Other cryptographic initiatives are more controversial. Sam Bankman-Fried, the billionaire owner of FTX, one of the world’s largest cryptocurrencies exchanges, has shaken futures market unconditional by making a proposal to U.S. regulators that could eliminate market brokers.

He argues that risk management should be done by computers in all markets, just as it does in crypto. This suggestion did not go down well with the runners as it would not give them any role. However, the Commodity Futures Trading Commission (CFTC), the U.S. regulator of the derivatives market, launched a consultation on the proposal, which could see large banks like Goldman Sachs excluded from trading.

The CFTC is considering allowing Bankman-Fried to sell leveraged cryptocurrency derivatives to retail investors and liquidate its operations directly, removing intermediate financial brokers from the process.

In crypto, that is already the norm as most exchanges also act as brokers. Not only do they agree on negotiations, but they manage their clients ’positions, causing some unease among regulators about the potential for conflicts of interest.

Bankman-Fried’s idea already has some fans, though regulators have yet to decide if they’re on board with his suggestion.

Chris Perkins, president of investment management firm CoinFund, is in favor, as he came up with the idea.

He used to run one of the largest futures brokerages in the world when he worked for Citi, the US bank, which is exactly the kind of business that Bankman-Fried’s proposal could close. “I spent my career building one of the world’s leading regulated derivatives businesses,” Perkins explains. “I was the middleman.”

But by joining the world of cryptocurrencies, Perkins changed his mind. Intermediaries, he believes, should go. “I’m going to be honest with myself and say you know what: [Bankman-Fried] you’re right “.

It remains to be seen whether regulators agree with Perkin’s conclusion.

Video: Cryptocurrencies: how regulators have lost control

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