Why the Development of Crypto Based Derivatives is Mooning

3Сommas Blog
6 min readFeb 8, 2020


Over the past few years, the number of new derivatives available in the crypto market has been steadily growing. Crypto derivatives are futures contracts and options for digital assets.

Most exchanges are already actively starting to add support for major digital currencies while looking forward to the possibility of futures trading, which will offer their clients the ability to increase profits by tens or even hundreds of times.

The cryptocurrency market is already quite volatile and provides plenty of opportunities for a trader to make a handsome return without the assistance of margin trading. So why are exchanges trying to look more and more like a traditional stock market by developing derivative instruments? And what can this lead to in the future?

Around the peak of the market at the end of 2017 was the launch of the first bitcoin derivatives — options and futures. These “new” instruments are associated with both a rapid rise in the market and its subsequent decline.

The entry of the Chicago Mercantile Exchange (CME) into the bitcoin futures and options market signaled a new stage in the development of the crypto industry. CME was the first to provide bitcoin futures and, to this day, is one of the most significant players in the financial and cryptocurrency market segment, interacting with influential hedge funds and institutional investors. Such derivatives offer investors new opportunities for risk management.

The activity of institutional investors increased significantly during 2018. The second quarter of 2019 drew more than $85 million in investments into the crypto industry. And as soon as Fidelity and Bakkt announced the launch of their platforms from the ICE intercontinental exchange, spot exchanges such as Binance, Kraken, BitFinex, Okex, and many others began to launch their own futures platforms to attract professional traders into the industry.

According to the latest data from the monitoring resource Skew, the total volume of trading in bitcoin futures contracts is regularly approaching and occasionally exceeding the mark of $20 billion.

Every month, the indicators update their highs, which is indicating a high interest in these tools by market participants, both on cryptocurrency exchanges and regulated platforms like CME, Bakkt, Fidelity, and other U.S. approved exchanges.

What are Futures Contracts?

Futures is a standardized contract for the delivery of a specified quantity of goods at a specified time. That is, futures imply the buyer’s consent to buy the asset at a predetermined price and a predetermined date. The main difference between futures and options is that futures oblige the buyer to make a purchase, and in the case of an option, the buyer has the right to refuse the purchase.

For example:

  • Buyer A bought a Bitcoin futures contract worth $10,000 from Seller A in exchange for one bitcoin. So Buyer A receives $10,000; Seller A receives one bitcoin.
  • On a specific date set in advance, Buyer A has to repay Seller A $10,000. When Buyer A repays $10,000, Seller A buys as much bitcoin as they can with that $10,000 and gives it to Buyer A. If bitcoin is at a rate of $5,000 now, then Seller A buys two bitcoins with the $10,000 and returns them both to Buyer A.

There are also perpetual futures contracts that do not have a settlement date or closure. You can trade these contracts at any given time. One of the main advantages of futures instruments, they allow you to bet on future increases or decreases in the value of an asset. Crypto traders received the same set of tools as their counterparts on the stock, currency, and commodity exchanges.

How Derivatives will Affect the Cryptocurrency Market

Trading in today’s crypto market versus trading just a few years ago, before the introduction of derivatives, is remarkably different. Earlier, Bitcoin supporters bought and sold the asset against the dollar, and the market grew as the interest of new users increased demand.

With the arrival of “new players” in the market and with approval of derivatives, the market is becoming more susceptible to manipulation by the “sharks” on Wall Street. They, in turn, have already opened a wide range for market manipulation, and they can not only inflate a new bubble, but they can also force the price of bitcoin to new lows.

For example, if institutional players open futures contracts for bitcoin on the CME exchange and use their n-th billion dollars to lower bitcoin, then there may be a massive panic selling on spot exchanges. Traders will begin to massively sell their savings, which will create a collapse in prices.

The availability of futures contracts on traditional exchanges will make Bitcoin’s position a “legal asset” in its financial and legal system. As these tools evolve over the coming years, we can expect that the leading digital assets will take their place on global exchanges. Eventually, they can become the same assets as the dollar, precious metals, and other securities or goods.

To the above, you can add a recent statement from CFTC CEO Heath Tarbert; he expressed confidence in a conversation with Bloomberg that next year regulated futures for Ethereum will appear on the market.

“We have already seen bitcoin futures, both settlement, and delivery. I believe we will also see Ethereum futures. ”

The existence of derivatives for digital assets can increase investment interest even more, hence the demand for the underlying asset and its value. This development suggests that global demand for digital assets and market liquidity will increase significantly in the coming years, making Bitcoin and other assets even more attractive for long-term investments and diversification of the investment portfolio.

When Will Bitcoin ETF Launch?

An Exchange Traded Fund (ETF) is a set of securities linked to a specific index. An ETF allows investors to diversify their assets without owning them.

In recent years, there has been a constant buzz about the launch of the Bitcoin-ETF. Still, the Securities Commission (SEC) has refused to launch nine investment funds for Bitcoin: CBOE, VanEck and SolidX, ProShares Bitcoin ETFs, and ProShares Short Bitcoin ETFs, which were rejected together with NYSE Arca.

U.S. regulators still have concerns about the possibility that Bitcoin will become a new trend for traders. The regulator emphasized that the risk of manipulation is the reason that the commission rejects all offers to open cryptocurrency ETFs.

They are citing many factors, from insignificant futures trading volumes to the possible risk of manipulation and fraud, since most crypto exchanges are unregulated.

According to the Winklevoss brothers, in the long term, Bitcoin will be able to maintain its position as a means of preserving value, and its capitalization will overcome the $7 trillion mark. The brothers have been denied twice for the launch of a Bitcoin ETF on the Gemini exchange.

Fundstrat founder Tom Lee agrees, in a recent interview on Block TV, he said:

“There are several years left until ETF approval, but it will become the main instrument for institutional investors to join the market. We expect the ETF to provide $30 billion in demand in its first year. Bitcoin should cost about $150 thousand to be liquid enough to cope with the volumes expected from ETFs. ”


In the coming years, once a bitcoin ETF is launched, we will be able to observe how various exchange-traded funds will dominate the digital asset market. The cryptocurrency market will become increasingly centralized and prone to aggressive manipulation by institutional investors, who will act exclusively in their interests.

Naturally, Wall Street “sharks” are full of expectations for a convenient trading tool. And the next step will be the creation of a Bitcoin-ETF, which can bring vast amounts of capital to the industry. There are a lot of pros and cons in this, but only time will tell how this will affect the industry.