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Crypto Derivatives is Key Battle Front for Exchanges – Here Are Some Early Winners and Losers

The crypto industry is witnessing a sudden interest in the derivatives market by crypto exchange companies in a bid to fill the void left by the defunct FTX exchange. Besides the need to fill the gap left by one of the largest providers of derivatives services, the exchange platforms are driven by declining volume and liquidity in the cash market.

Crypto Exchanges Rush To Fill Void Left By FTX In The Derivatives Market,
The implosion of Sam Bankman-Fried’s FTX exchange in addition to revealing dire regulatory gaps in the crypto industry left a massive void, which existing crypto exchange firms are rushing to capture.

At the moment, this market segment is dominated by Binance, the largest crypto exchange by daily traded volume. According to a report by Bloomberg, some platforms are showing interest in buying FTX’s derivatives platform in the United States, although many are considering building brand-new derivatives exchanges from the ground up.

Furthermore, the gap was exacerbated by the fall of several crypto lending giants like Genesis Global Holdco LLC, leaving traders with only a few options where they could leverage their positions.

“There is a clear vacuum left in the crypto derivatives market, especially for regulated entities. We’ve seen a number of companies show up on the centralized side as well on the decentralized side to fill this vacuum,” Tarun Chitra, one of the partners at crypto venture fund Robot Ventures told Bloomberg.

Significant crypto lenders did not survive the crypto, including Voyager Digital Inc. and Genesis. This means traders and investors—mainly institutional trading desks are turning to the few derivatives platforms to access leverage for their market positions.

Institutional traders prefer buying derivatives products such as futures and options to spot trading mainly because “derivatives enable them to have the ability to go long-short and express their view and hedge the portfolio,” David Martin said. He is the head of institutional coverage at FalconX, a digital asset prime brokerage firm.

Derivatives Dominate Crypto
As for hedge funds, primarily trading on CME Group Inc., a renowned exchange based in the United States, cash-settled futures contracts also eliminate the risk of encountering complex and crypto-specific issues, such as the safekeeping of assets or custody.

Some of the leading derivatives exchanges are offering investors a maximum leverage of 100x for specific crypto assets despite Binance announcing the intent to cut the maximum leverage a trader can apply when trading futures contracts to only 20x from 100x.

According to Antonio Juliano, the founder, and CEO of dYdX, a decentralized exchange (DEX) recently said during an interview that the shakedown in the crypto market “opens up a lot of opportunities in the market because both FTX’s literal market share not existing anymore, and also their brand as somebody that was building innovative things in the space obviously no longer being the case.”

DEXs were some of the immediate beneficiaries of the implosion of FTX in November as investors shifted their focus to self-custody amid an uproar about the safety of centralized exchanges (CEXs) like Binance. dYdX and GMX were some of the platforms that saw an instant jump in trading volume.

Top exchange companies like Gemini and Blockchain.com have been showing interest in taking over some business products owned by the bankrupt FTX exchange such as LedgerX. This interest in LedgerX could be attributed to its status as a regulated derivatives platform under the oversight of the US Commodity Futures Trading Commission (CFTC).

Wintermute, a global market maker recently told investors it is “seriously) mulling building a derivatives exchange to cater to the needs of professional traders. In addition to that, officials of the former Jefferies Financial Group Inc. have just launched a new crypto exchange, which will expand to provide crypto derivatives.

Meanwhile, the largest exchange Binance’s derivatives services in Australia is still under review.

Crypto exchanges are perceiving the move to offer crypto derivatives services, especially those focused on the institutional sector as the most straightforward way to weather the impact of the bear market.

Companies have been forced to rely on the paltry revenue from transaction fees charged on spot trades. Interest in spot trading has faded over the last six months, particularly after the implosion of FTX.

The recent bullish move in Bitcoin and Ethereum prices to above $28,000 and $1,850, respectively gave the derivatives market a boost amid renewed interest among traders. Bitcoin is now trading near its nine-month high while ETH is at a seven-month high.

“When the market is moving sideways, we see our volume decline. However, when markets move … up or down. In those moments, people tend to use options, and of course, we benefit from that,” Luuk Strijers, the CCO of Deribit, a derivatives exchange told Bloomberg.

Investors often capitalize on market volatility while employing risk management techniques to leverage their positions. Demand for derivatives is likely to keep increasing as volatility in the market increases.

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