Crypto derivatives can predict price movements, but they need institutional buzz to really work


The cryptocurrency market has been under pressure, and most of the tokens in the crypto space have witnessed a sharp drop in prices since the first week of December. Flagship cryptocurrency token Bitcoin (Bitcoin), experienced a flash crash on December 4, in which the price of the token fell below $50,000 in the past two months, according to Cointelegraph Markets Pro.

As the market is gradually painted red, this phenomenon has appeared in most cryptocurrency tokens. Ethereum and Ethereum (Ethereum) Has become the network and token of choice for most decentralized finance (DeFi) protocols because the price of Ether has fallen by 19%.

However, BTC and ETH also have a healthy futures and options market, which may have played an important role in anticipating the continued decline in the price of these tokens.

Coincided with the price collapse on December 4, 950 million US dollars BTC option value expires, Even when the price is $57,000, short positions have an advantage over long positions. Data on options leading to expiration shows that since most put options are below the $57,000 mark, it tends to bearish market forces. A put option is a contract that gives the option holder the right (but not the obligation) to sell a predetermined amount of the underlying asset at a predetermined price.

A call option is an option in which the option holder has the right to purchase the underlying asset under similar conditions. Compared with call options that cause options to expire, the proportion of put options is highly indicative of the market’s general sentiment towards the underlying asset. In this case, there is a clear sign that even a week before expiration, the market is severely bearish, and prices soaring coexist.

Power to play

Luuk Strijers, chief commercial officer of the crypto derivatives exchange Deribit, spoke to Cointelegraph about the signs in the derivatives data, which hinted at the impending crash:

“Before the weekend correction, we saw a spike in IV that may be related to post-expiration related sell-offs. There seems to be some uncertainty in the market, and we are seeing a risk reversal strategy (sell OTM call option + buy OTM put option) .”

Since the expiration date of an option is the last date on which the option holder can decide to exercise the option to execute the purchase or sell order of the underlying asset or the holder decides to abandon the option and make it worthless when it expires, expiration is usually It will become a major event that affects the price dynamics of the underlying asset, in this case Bitcoin.

Strijers commented on the impact of this particular expiration on BTC. He said: “It is difficult to determine. However, more and more people are paying attention to the expiration and open interest level of certain key strikes, which amplifies the The relevance of the big maturity date.”

Adam James, a senior analyst at OKEx Insights, the research department of the cryptocurrency exchange OKEx, spoke with Cointelegraph about the signs that led to the crash: “The most obvious signs that a crash may be about to happen are extremely high open interest and active funds. Two things usually don’t bode well and a flush is usually required.” He further added:

“The cascading sell-off that we saw on Saturday is just that-thin weekend orders can easily drive over-leveraged bulls and cause OI to reset. As it happens, this crash is one of the biggest surrender events in BTC history. .”

Although this phenomenon shows that the price of the underlying asset is closely related to the derivatives market, the market size is still only a fleeting moment in the size of the spot market.

Institutional investors may change the rules of the game

Considering that the derivatives markets that exist in the first two cryptocurrency tokens, BTC and ETH—despite the significant increase in open interest—it only account for a small portion of the current market value of the spot market and its assets.

Open interest (OI) for BTC options Grown up This has increased from nearly US$1 billion on July 1 to around US$11.4 billion at the time of writing. OI hit a record high of US$15.72 billion on October 20. Soon after, BTC hit a record high of $68,789.63 on November 10.

Considering that the total market value of Bitcoin in the spot market during the same period exceeded US$1 trillion, it is obvious that cryptocurrency options are only in their infancy, and even still play a vital role in price discovery and prediction capabilities as an asset. A similar phenomenon will also be observed when looking closely at the OI data of ETH.

Cointelegraph discussed the size of the crypto options market with Igneus Terrenus, head of communications at Bybit, a cryptocurrency derivatives exchange: “When you compare it to the options market in the commodity sector or stocks offered by Robinhood, what’s currently available in cryptocurrency options The market seems to be insufficient for both institutional traders and retail traders.”

Institutional investors can change the rules of the game by exponentially increasing the size, liquidity, and depth of these markets, causing drastic changes in the crypto derivatives market. Investment banking giant Goldman Sachs has revived its closed cryptocurrency trading department in this bull market. Expected The cryptocurrency options market can be regarded as the next frontier in the adoption of cryptocurrencies by institutions.Wall Street Bank itself Announce Plans to expand their crypto trading platform to participate in BTC and ETH derivatives.

However, Strijers explained that the entry of institutional investors into the crypto derivatives market is a slow process, especially due to the Know Your Customer (KYC) and due diligence process. He said: “In November, we accepted more institutional clients than in any previous month-the larger the company, the longer the process of mutual acceptance.” He added:

“Now, these large clients also have extensive platforms and due diligence procedures, especially those who provide third-party asset management in some form, such as multi-billion dollar macro funds.”

Other altcoins are catching up

At present, in various cryptocurrency exchanges, such as Deribit, LedgerX, OKEx, FTX and even the Chicago Mercantile Exchange (CME), the world’s largest traditional asset class derivatives exchange, there is a flow that only exists in BTC and ETH Option market.

However, there is no option product available for other well-known cryptocurrency tokens, such as XRP (Ripple), Solana (Sol), Binance Coin (Bitcoin), polka dot(point) And many other tokens, although these tokens have a highly liquid spot market or even a futures market.

Strijers further explained the reasons behind this existing scenario: “We plan to launch SOL products soon. Beyond that, it remains to be seen because we always need proper market maker coverage, including, for example, Sunday night and Other times, on all strikes and due dates. We cannot rely on a few market makers, but need more market makers.”

related: Despite regulation of FUD, the cryptocurrency derivatives market still shows growth

Nonetheless, there is a liquid futures market available for several top cryptocurrencies, even including the meme coin Dogecoin (dog) And the native token of the non-fungible token (NFT) game Axie Infinity (AXS). Nevertheless, although the market ended one of the longest bull markets in the history of the ecosystem, the OI of these tokens based on futures products has not even reached $1 billion.

Except for BTC and ETH, the token with the highest futures OI is SOL. permanent At the time of writing, it was nearly $870 million. Ranked second is DOT with an OI of 573 million U.S. dollars, followed by BNB with an OI of 521 million U.S. dollars.

Considering that the spot market value of all these altcoins exceeds US$50 billion, the futures market for these tokens currently accounts for only a small part of their total market value. This shows that even if there is a liquid futures market for these assets, their scale is very small and cannot have a significant impact on the price, although they do play a role in the price discovery of the underlying token.

As the adoption of cryptocurrencies by institutions and retailers has grown by leaps and bounds in the past year, their participation in market derivatives will also increase over time, especially once institutional giants like Grayscale stand out and participate heavily in this market. Drive the market and pricing efficiency of these assets.