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5 Ways Derivatives Could Change the Cryptocurrency Sector By 2022

5 min reading

Here are five methods which would help transform the cryptocurrency enterprise for good by the year 2022.


We've all heard stories about the liquidation of billions of dollars in future contracts that caused the prices of Bitcoin (BTC) and Ether (ETH) to drop 25% throughout the day, but the truth is that since BitMEX was launched, the industry has gone from being 100 times leveraged to being distracted by futures contracts. immortal in May 2016. The derivatives industry goes beyond these private client-managed instruments as institutional clients, mutual funds, market makers, and professional traders can take advantage of the hedging capabilities of the instruments.

In April 2020, Renaissance Technologies, a $130 billion hedge fund, received the green light to invest in the bitcoin futures market using a CME-listed instrument. This trading giant is not like a cryptocurrency retailer, but focuses on arbitrage and unjustified risk.

Short-term correlation with traditional markets may increase

As an asset class, cryptocurrencies are becoming a substitute for global macroeconomic risk, regardless of whether crypto investors like it or not. This is not exclusive to Bitcoin as most commodity instruments experience this correlation in 2021. Even if the Bitcoin price is divided monthly, this short-term strategy of including and excluding this risk has a strong impact on the Bitcoin price. Notice how the price of Bitcoin always correlates with the United States 10-year Treasury Account. Whenever investors want higher returns for holding these fixed income instruments, there are additional requirements for crypto exposure.

Derivatives are very important in this regard as most mutual funds cannot invest in cryptocurrencies directly, so using regulated futures contracts such as CME Bitcoin futures allows them to enter the market.

Miners will use long term contracts as a hedge

Cryptocurrency traders do not realize that short term price fluctuations are not important for their investments from a miner's point of view. As miners become more professional, their need to constantly sell these coins is greatly reduced. For this reason, derivative instruments are primarily created. For example, a miner can sell a three-month futures contract that expires in three months, effectively closing the price for the period. Then miners know their profitability in advance, regardless of price movements.

Similar results can be achieved by trading Bitcoin options. For example, a miner may sell a $40,000 call option for March 2022, which is enough to compensate the price of BTC to $43,000 or 16% below the current $51,100 threshold of $43,000 minus 42% so that the option instrument acts as insurance.

The use of bitcoin as collateral for traditional funding will increase

Digital Asset Fidelity and crypto lending and exchange platform Nexo recently announced a partnership that provides crypto lending services to institutional investors. The joint venture will allow Bitcoin-backed cash advances that cannot be used in traditional financial markets. This move will reduce pressure on companies like Tesla and Block (formerly Square) to continue adding Bitcoin to their balance sheets. Using it as collateral for your day-to-day business significantly increases your risk limit for this asset class.

At the same time, even companies that are not seeking targeted exposure to Bitcoin and other cryptocurrencies can benefit from higher industry earnings compared to traditional fixed income securities. Loans and credit are ideal uses for institutional clients who don't want to be directly exposed to Bitcoin's volatility, but at the same time want higher asset returns.

Investors will use the options market to generate "fixed income"

The futures exchange currently holds 80% market share in the Bitcoin and Ether options market. However, US regulated options markets such as CME and US derivatives FTX (formerly LedgerX) will eventually gain strength.

Institutional traders dig into these tools because they offer the ability to develop semi-fixed income strategies such as closed calls, iron condors, bull call spreads, and more. In addition, traders can use a combination of call (buy) and put (sell) options to stop trading options with a predetermined maximum loss without the risk of liquidation.

Central banks around the world are likely to keep interest rates near zero and below inflation rates. This means that investors are forced to look for markets that offer higher returns, even if they carry some risk. Because of this, institutional investors will enter the crypto derivatives market in 2022, changing the industry as we know it today.

Volatility reduction is coming

As discussed above, crypto derivatives are now known to increase volatility when unexpected price fluctuations occur. This forced liquidation order reflects a futures instrument used to achieve excessive debt, a situation that retail investors typically cause.

Institutional investors, however, will be more prominent in the Bitcoin and Ether derivatives market and therefore increase supply and demand for these instruments. Therefore, a $1 billion retail liquidation would have less of an impact on prices.  In short, the increasing number of professional actors involved in crypto derivatives will reduce the impact of extreme price fluctuations by absorbing this order flow. Over time, this effect will result in lower volatility or at least avoid problems like the March 2020 crash when BitMEX servers "down" in 15 minutes.

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