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The derivatives market is heating up in crypto, and Binance might be the next firm to jump in


  • The market for crypto derivatives is heating up
  • A number of firms have launched new businesses in the space or are looking at entering the market
  • It could become larger than the spot bitcoin market

Most cryptocurrency trading is stuck in the doldrums but one corner of the market is heating up, according to numerous market specialists. 

Derivatives. It’s a word that has finally found its way from the world of pedantic Wall Street parlance to the center of the crypto trading world. Derivatives markets cover an array of financial products including options, futures, swaps, contracts for differences — all of which provide exposure to the market in a way that doesn’t touch underlying crypto. 

Such products are becoming more attractive to crypto exchanges and trading firms as potential new product offerings while volumes remain stagnant in the underlying spot market. They are also the focus of a number of new firms launching this year. 

“As an ecosystem matures, and as the crypto ecosystem matures, people look for new ways to express a view of the market,” Thomas Chippas, chief executive officer of ErisX, said in a phone interview with The Block. ErisX is one of the crypto firms set to launch a crypto derivatives exchange this year in the United States — others include Intercontinental Exchange’s Bakkt and SeedCX. 

ErisX, which plans to offer trading of futures for bitcoin and other assets, is betting that so-called physically delivered futures will lure traders looking to execute on more complex strategies and firms looking to hedge their positions in the underlying market.

“Miners, consumer platforms and token projects are all looking for different ways to manage risk,” Chippas said, adding that futures in traditional markets serve the same purpose.

“Take gold, for instance, everyone down the chain of that product is going to want to take risk off that product,” he said. 

Meanwhile, Chicago-based options exchange LedgerX has made launching new derivatives a focus of its business in 2019. The firm recently announced a new contract that would allow traders to bet on when the bitcoin block reward will occur. It has other products in the works set to launch this year, CEO Paul Chou told The Block. Chou said it’s possible that the derivatives market could end up being even larger than the underlying market as new products roll out and more firms enter the space.

“One of the interesting aspects of derivatives is often their notional value can outpace spot,” Chou said in a phone interview with The Block. 

“The proliferation is going to continue,” Chou added. “Here in the U.S. you have to go through a lengthy review process for every new product, but there is an opportunity to get new revenue lines and every new derivative contract is a new revenue line.”

“It makes sense that we would see that development in the ecosystem,” he concluded.

Phillip Gillespie, who runs B2C2’s Japan unit, told The Block in an interview the firm’s revenues from trading CFDs could surpass its revenues in electronic spot crypto market making. It launched the product earlier this year. Deribit, which offers futures and options trading, is testing an option tied to ethereum, according to sources. Native spot crypto exchanges also see futures as a possible new revenue opportunity as well.

Kraken, the San Francisco cryptocurrency exchange, acquired European future exchange Crypto Facilities for more than $100 million. The exchange offers trading of both fixed maturity and perpetual futures tied to a number of crypto assets. Binance, the largest cryptocurrency exchange by volume is looking into supporting futures trading, according to several sources familiar with the situation.

Futures could be a saving grace for these types of firms as trading volumes for their markets have compressed as retail interest in the market has waned — leaving mostly professional traders with more complex needs. In total, volumes for such firms have declined by 80 percent. BitMEX, on the other hand, has stood out in the bear market as a derivatives giant. The firm, which trades a type of future called a perpetual swap, reported notional annual trading volumes over $1 trillion. As noted by research from CryptoCompare, BitMEX and rival BitFlyer saw a 17 percent increase in volumes from October to December. 

“The space has been moving into this direction for a long time,” said Mark Lamb, CEO of CoinFLEX, a crypto derivatives exchange that launched earlier this year. His firm supports trading of physically delivered futures for crypto. Perpetual swaps, by way of comparison, provide a way to synthetically trade spot bitcoin. 

“Traders are all about the efficiency of their capital and maximizing the return on equity,” he said. “Futures just make much higher returns more possible as they are really great for arbitrage and other complex strategies.”