The crypto market has thundered into 2023 with a resounding rally that’s made the calamities of last year seem like a bad dream. Spot and futures volumes have been robust all through January, and February is showing no sign of taking its foot off the gas. But as demand for futures products grows, with a CME volume reaching its ATH of $84 million, the fall of FTX has left space for new players to enter the game. Does this mean we are at the beginning of the crypto derivatives market growth cycle?
Look to the Futures
Whatever way you slice it, the crypto market is back on again. From NFT mints selling out in seconds to Bitcoin showing a 50% increase since the beginning of the year, the green shoots of recovery are everywhere. Nowhere is this more evident than in the derivatives space. Futures contracts are prized not just for allowing traders to deploy size (hello, leverage!) but for allowing the market to peer into the tea leaves and glean what’s coming next.
In late January, bitcoin derivatives entered contango, with futures prices exceeding spot. In a crypto context, this trend can be a bullish indicator, and subsequent market movements appear to support this thesis. Coupled with the expected arrival of a hallowed “golden cross” (the point at which the 50-day simple moving average exceeds the 200-day SMA), there’s cause for confidence that this ain’t no sucker’s rally. BTC is going to be in play all year, and the smart money is betting on most of that movement being upwards.
Futures volumes for January hit $697 billion, almost twice that of December, while the number of short liquidations spiked, proving the danger of betting against bitcoin in a bull market.
Life After FTX
A dozen years into its lifespan and bitcoin still dominates crypto trading volume, which is currently scattered across derivatives exchanges. Although the FTX collapse led to a drop in trading activity, it also resulted in an increasing demand for derivatives as reliable hedging instruments. The exit of FTX, which accounted for a significant portion of the futures trading volume, also led to a reorganization in the market.
Among others, Bitget recorded the highest gain in the derivative market share, growing from 3% to 11% in the second half of 2022. That made the exchange enter the top three crypto derivatives platforms. Combined, futures platforms account for more than $150 billion in trading a day at present.
The absence of any single futures platform to hold sway over the industry can only be a good thing. It provides a diversity of services and caters to traders by region, product preference, and asset type. Healthy competition between exchanges is good for traders and good for the industry as a whole. Moreover, there is a growing demand for new products that can satisfy the needs of a crypto-savvy generation that has been raised on leverage.
It’s a challenge difficult to be met by the majority of trading platforms, and thus it seems inevitable that futures traders will fragment, taking their business to platforms whose architecture and offerings meet their demands. The diversification of the derivatives market has already begun to manifest.
Traders are also less hesitant to try derivatives exchanges now that the leading players have implemented better safeguards to protect user funds. Binance got the ball rolling with its Safe Asset Fund, followed by Bitget Protection Fund; these two exchanges alone have assets worth billions of dollars set aside for worst-case scenarios.
This Time Is Different
In the 2017 bull market, derivatives traders had the only option: BitMEX. Back then it was the only show in town and it profited handsomely from the fees it creamed off the BTC market. Five years on and there's a choice not just from centralized exchanges but also on-chain. Decentralized derivatives, formerly only a dream, have become manifest. CEX and DEX exchanges alike have also introduced copy trading, making it easier for beginners to trade derivatives by emulating the pros and learning from their mastery of the game.
Scores of EVM chains have emerged, each with their own derivatives platforms offering futures and options contracts that are settled on-chain. Decentralized protocols serve up leveraged trading for DeFi users who benefit from no KYC and the security risks it carries, coupled with full order book transparency. Now you know that the exchange isn’t trading against you.
For all their promise, however, on-chain perps are unlikely to see mass adoption. Despite improvements in blockchain speed and fee reduction, DEXs remain to be for DeFi super users only.
Where Next?
At the dawn of 2023, the crypto industry finds itself in an unusual position. The infrastructure is largely in place. Blockchains are now scalable. Multi-chain is here. CEX infrastructure is robust and load-resistant. Assuming the first stirrings of market recovery can manifest into a full-blown bull market, the stage is set for exponential growth in trading volumes, driven by derivatives.
All that’s missing is the institutions, who have yet to enter the space en masse, but the maturation of the underlying technology and introduction of enterprise-grade solutions can be a remedy for this. Meanwhile, the introduction of more sophisticated derivatives products, not just representing crypto assets, but also commodities and real-world assets, will bring billions and eventually trillions of dollars of trading on-chain. We’re not quite there yet. But the foundations are in place. Everything else, from institutional adoption to RWAs, will only catch up in a matter of time.