Education

Bitcoin Derivatives Markets Continue to Grow – Why that’s good for investors

By
Peter Eberle
on
October 15, 2020

Use of Bitcoin futures and options is growing despite access hurdles… is this good for all investors?

A healthy derivatives market can benefit all market participants through better liquidity, less volatility, and the ability to customize individual portfolios. Trading futures and options on futures allows investors to take only the risk they are comfortable with and to hedge exposures that they do not wish to bear.

The futures market for Bitcoin has been going strong since 2017 with volumes reaching record levels both in terms of open interest and volume in the past few months.

The options on futures volumes and open interest are gaining traction as well. Though the Chicago Mercantile Exchange (CME) only listed options on futures in January of 2020, they have quickly climbed into 2nd place worldwide in open interest. This is big news for US-based investors since they are barred from trading on the Deribit Exchange – the world’s most active derivatives exchange for Bitcoin.

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source: Skew.com, accessed October 15, 2020.

The CME recently posted the following information in a press release:

Q3 Bitcoin futures highlights
Average daily volume (ADV) reached 8,960 contracts (44,800 equivalent bitcoin or ~$490M notional value).
Record OI of 15,406 contracts (77,030 equivalent bitcoin) on August 17.
40%+ of BTC volume was traded outside the US, with ~15% coming from APAC and ~25% from EMEA.
5,600+ unique, active accounts have traded since launch.

The CME has climbed to 2nd place in options open interest despite a lack of retail access to the market. Many of the most popular retail trading platforms for US investors do not offer futures or options on futures. Though one can trade Bitcoin futures listed on the CME through an account at Etrade or Interactive Brokers, these brokerages do not yet allow options on Bitcoin futures. This makes the CME’s growth even more impressive – some investors are willing to jump over hurdles to trade these products in spite of these barriers..

Fund managers and retail investors will benefit from the continued growth in volume and open interest. The entire Bitcoin ecosystem will gain legitimacy through the expansion of regulated markets.

Peter Eberle is President and Chief Investment Officer of Castle Analytics, LLC, a manager of digital currency investment funds based in the San Francisco Bay Area.

For important disclosures regarding the above, please see https://castlefunds.com/disclaimer.