Bitcoin Futures hog the limelight, but Options could be the next big thing
According to TokenInsight’s latest derivatives exchange report, the Futures market recorded the highest growth in trading volume across the digital asset ecosystem.
That’s not all, however. The report went on to note that spot market trading volume was responsible for 50.92 percent of the market in Q1 of 2020, with Futures accommodating 39.08 percent of the total derivatives volume. It further highlighted that by the end of 2020, Futures trading volume would take over spot volumes and its trading volume would have doubled before the start of 2021.
The competition between Futures and spot markets has been fierce over the past quarter; however, the Options market has been left completely out of the conversation.
The report argued that a major drawback associated with Options trading is that the number of underlying assets is limited, and Bitcoin is the only major crypto-asset that acts as a legitimate investment vehicle. The number of Options trading platforms is also limited across the industry and only over the past couple of years have some of these exchanges started to make moves in this particular derivatives sector.
Additionally, the Options market was also deemed to have high counter-party risk. The report added,
“Due to the high trading costs, high short-selling costs, and relatively low liquidity of the cryptocurrency market compared to the traditional market, market makers or exchanges cannot fully hedge position risks and have to be exposed to market risks, especially when the market is volatile.”
However, the future may hold a different outcome for Bitcoin or any other crypto-options trading idea.
According to the Journal of Finance, Options trading of an asset can lead to a decrease in the spread, while also contributing to an increase in the quoted depth of a contract. Hence, the trading volume, trading frequency, and transaction size improve in the market. The main advantage of Bitcoin Options is that it improves the ecosystem as well, rather than only being profitable to an organization or individual.
However, it is important to note that liquidity needs to improve in order for the above parameters to come to fruition.
Deribit’s growth prime example of Options Growth
The potential of Bitcoin Options is highlighted best by Deribit’s growth over the past 18 months. Deribit, at the time of writing, holds more than 80 percent of the total trading in the Options market.
In fact, according to its March 2020 institutional newsletter, since March 2019, the total turnover in terms of USD has always been more than $5 billion and after the recent dip towards the end of 2019, the total turnover crossed $16 billion.
However, the increasing number of Bitcoin Options contracts from the start of 2020 has been the highlight. As observed from the above chart, it can be seen that there has been a steady increase over the past three months, something that is indicative of Options becoming popular in the community as well.
With the major focus still on Futures and spot volumes, the Options market should not be slept on as the potential in this derivatives sector could truly multiply over the next few months.