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Why Crypto Exchanges Are Competing to Offer Derivatives?

Author: nicolas tang

 

Trading Derivatives is an extremely profitable way in crypto world. Crypto currency markets have ‘boomed’ since 2017. Crypto derivatives are becoming the way of life for serious crypto traders. Different platforms offer various options to trade derivatives.
Futures exchanges like Phemex and Binance exchange, trade in standardized derivative contracts. These are futures contracts on a whole range of underlying assets.
Phemex is another emerging derivatives exchange offering Bitcoin and USD settled perpetual contracts of; BTC, ETH, XRP, LTC, EOS, with up to 100X leverage.
But before we talk about all this ‘Hot War’ going on between exchanges to offer derivatives, let’s talk about what a derivative actually is?

What are Derivatives?

A derivative is a contract between two or more parties whose value is based on a pre-agreed underlying financial asset or set of assets. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks. An exchange traded derivative is a financial instrument that trades on a regulated exchange whose value is based on the value of another asset.

What is the purpose of Derivatives?

As derivatives trading continues to expand across the world, competition is heating up among crypto exchanges vying to carve out a hefty share of this lucrative market. Derivatives trading volume hit 25.2 billion contracts in 2016, a 2% increase from 2015. So, derivatives trading hit an all-time global high in 2018, with more than 30 billion contracts traded on exchanges, and futures trading alone up 15%.
The purpose of a derivative is the management and especially the mitigation of risk. When a derivative contract is entered, one party to the deal typically wants to free itself of a specific risk, over a given time period.
The primary purpose behind derivative contracts is the transfer of risk without the need to trade the underlying. This allows more effective risk management. In addition, the derivatives market plays a role in information discovery market efficiency.

What is the role of an exchange in Derivative instruments?

The exchange plays a major role in derivative instruments like futures and options. For example, in futures, exchange will get the refundable margin from buyer and seller. Buyer and seller trade the contract on the strike price for the asset. Derivatives trading in the crypto sphere has been a matter of speculation and discussions.
Lately, a surge in the number of platforms offering derivatives trading has been witnessed. Many exchanges are also considering to launch options trading in the first quarter of 2020. It seems, this warm competition between cryptocurrency exchanges to offer derivatives is going to get even more heated up in 2020.

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