Cryptocurrency Derivatives Trading: Potentials, Players, and Pitfalls
@zamboglouDemetrios Zamboglou PhD
Fintech specialist and thought-leader with extensive industry experience and academic background.
Cryptocurrency derivatives are financial products that have gained popularity of late. For the uninitiated, a derivative is a security that obtains its value from other assets (cryptocurrencies). A common form of cryptocurrency derivative is the Bitcoin futures. Over the course of the years, several cryptocurrency derivative platforms have been launched.
Former Developers at Morgan Stanley Launch Cryptocurrency Derivatives Platform
Earlier this month, eight former developers at U.S. financial services company Morgan Stanley launched a cryptocurrency derivatives platform called Phemex. According to the developers, the platform will offer 100x leverage to retail and institutional investors in Bitcoin, Ethereum, Ripple contracts. And so far, 1000BTC is traded daily in its BTC/USD perpetual contracts.
What's more, the former Morgan Stanley developers expect that other traditional financial products including stock indexes, foreign exchange, interest rates, etc. will back these contracts. They also revealed that Phemex will be ten times faster than regular cryptocurrency trading platforms.
Exchange is “on par with Nasdaq”
Jack Tao, Phemex's co-founder who was an executive at Morgan Stanley for 11 years also revealed that Phemex could have an option trading soon. Tao outlined that the founding members of Phemex have a great level of expertise given that they have worked with Morgan Stanley for a while
Tao also said the exchange was the first to bring the level of sophistication at Wall Street to crypto derivatives markets.
“Our matching engine, trading engine, and risk engine were six months in the making," he said.
That being the case, Tao is confident that Phemex is on par with and will rival existing platforms like the Nasdaq derivatives exchange.
More Crypto Derivatives Platforms
On the other hand, Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchabitcoin futures.nge (CBOE) were the first to introduce Bitcoin futures in December 2017. Likewise, a Bitcoin derivative was launched by LedgerX, who became the first regulated institutional exchange to introduce a crypto derivative.
CME, a Chicago-based exchange is also looking
to launch options (on its bitcoin futures contract), another form of cryptocurrency derivatives in the first quarter of 2020. Also, Bakkt also revealed
"launch the first regulated options contract for bitcoin futures,” on December 9, 2019.
Will Cryptocurrency Derivatives Be Worth the Risk?
Cryptocurrency derivatives were developed as a way to mitigate the risk associated with the volatility of cryptocurrencies. Hence, it served to reduce risk exposure for individuals and corporations. Moreover, they were meant to aid investors to protect their investment portfolio from losses. In line with that, it also became a useful tool for cryptocurrency enthusiasts to speculate on the price of these virtual assets.
Despite these benefits and popularity of cryptocurrency derivatives, there are still uncertainties if it may be worth the risk in the first place. CEO of Berkshire Hathaway Warren Buffett, for instance, stated
"In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Nonetheless, Buffet noted that the major problem with these derivatives lies in their overexposure. In his opinion, this overexposure was caused by banks and ignorant investors. And derivatives can bring immense value to companies if only leaders of such companies have some restraint and hold a limited amount.
There seems to have been weathered interest in cryptocurrency derivatives, An instance of this, is the case with Bakkt, who launched its derivatives in September 2019. The turnout was far from impressive especially when consideration is given to the hype that surrounded its launch.
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