Over the years, cryptocurrency derivatives have witnessed a number of developments. Firstly, crypto derivatives exchanges have had to sweat it out with regulatory authorities. Exchanges have had to defend their derivative products so as to be allowed to launch them for the general public.
In 2019, old cryptocurrency derivatives players set new records in terms of trading volume as new players streamed in with innovative products. For instance, Bakkt and Phemex got into the market and posted significant futures and perpetual contracts trading volumes respectively. On the other hand, old players like the Chicago Mercantile Exchange (CME) set new trading volumes.
On the other hand, the Bitcoin spot market is still struggling from the plunge of prices since 2018. 2018 saw Bitcoin drop to almost below $3000 from $20000 in December 2017. This sent shock waves to the majority of Bitcoin spot market traders. Actually, some are yet to recover since the prices are yet to get back to the value of $20000.
Difference between Bitcoin spot market and derivatives market
In the Bitcoin spot market, investors own, buy and sell actual Bitcoin. In simple terms, it is the underlying market where actual Bitcoins are exchanged. On the other hand, in the Bitcoin derivatives market, investors enter into an agreement/contract to buy Bitcoins at a predetermined price and a specified time in the future.
In the Bitcoin derivatives market, investors don’t own the actual Bitcoins but rather trade on the speculations of the market prices of Bitcoin. The Bitcoin contracts which can either be futures, perpetual contracts, swaps or Options obtain their value from the value of Bitcoin.
In the spot market, investors have to literary own some Bitcoins. Therefore, there is the actual buying, selling, and storage of Bitcoins.
Bitcoin derivatives Popularity
Though Bitcoin derivatives are a new frontier in the financial markets, they have rapidly gained popularity to become one of the most traded products. At the forefront is the Bitcoin futures which have become the most traded cryptocurrency derivative since 2017.
The average daily trading volume of Bitcoin futures is about 3,500 contracts with an accumulative value of over $100 billion. Considering that the value of Bitcoin in the spot market has considerably dropped since December 2019, these figures are quite impressive.
From the statistics, it shows that investors are gaining confidence in derivatives and even opting to trade them instead of trading the spot market. In Bitcoin futures, for example, traders are able to hedge against the volatile market Bitcoin prices.
Again, Bitcoin derivatives are traded using leverage which allows traders to pay a small amount of the actual market price. Compared to spot trading where an investor has to meet the total cost of the amount of Bitcoins they are buying, in Bitcoin derivatives, the investor only pays a small amount and the rest is taken care of by the leverage.
Bitcoin derivatives and crypto derivatives, in general, have gathered huge momentum over the last two years and the trend seems to continue with even more vigor with new players coming in every day.
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