Crypto Derivatives: A Precursor

Derivatives are changing. And the future of Futures is unfolding at a rapid pace. 

In traditional spot and derivatives markets, recent trends in user experience such as zero fee trades, robo advisors, and high yield brokerage accounts are becoming commonplace. Younger demographics like millennials, who started working during the great recession, are now able to dip their toes into stock, bond, and ETF investing at their own pace. 

This market shift is also made possible because of powerful new technology, giant merger and acquisition deals (see Schwab & TD Ameritrade and Morgan Stanley & E-Trade), and relaxed corporate tax regulations. The long term impact of these trends is yet to be seen. But we can confidently say that the disruption is just getting started. 

Old Guard, New Message

In Warren Buffett’s annual Berkshire Hathaway letter to shareholders, he recently made clear that, even though the firm’s strategy is sound, the old way of doing things is changing. What worked yesterday will not work today. 

Traditional expectations that Treasury bonds are safe haven assets for long-term, steady returns are rubbing up against a macroeconomic reality of negative global interest rates from multiple central banks (see ECB, BoJ, SNB) with poorer performance than expected.  

In particular, Mr. Buffett wrote: 

“What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments. 

That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. [Edgar Lawrence] Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!”

Does Today Presage Tomorrow?

On Monday we experienced a 900 point drop in the Dow at the opening bell. Clearly, Mr. Buffett's warning was prescient. But what stands out here is his prediction that “equities will over time perform far better than long-term, fixed rate debt instruments.”

How does this prediction pair with changes in the spot and derivatives market with which this article opened?

Crypto Derivatives: Old Bottle, New Wine

Legacy financial institutions like CBOE, CME Group, and ICE, the parent company to NYSE, have been building their own proprietary solutions for trading crypto derivatives since 2017.

While CBOE was the first big player to explore crypto derivatives, it has since dropped out of the Bitcoin futures game. Now, CME and ICE’s Bakkt are competing with startups like Deribit and BitMEX to offer Bitcoin futures and options trading products that appeal to the masses.

For traditional traders, the regulatory clarity that these recognized institutions provide is very appealing. For a niche subset of traders, digitally native platforms can deliver trading efficiencies that the legacy players seek.

So, who will win mindshare in this emerging market for crypto derivatives?

Follow my HackerNoon account to stay tuned for the next article in this series: 

Crypto Derivatives 1.0: New Assets, Old Rails