By now it is well established that market speculators dominate the cryptocurrency sphere. Hedging and actual purchase/sales volume are a tiny blip relative to the massive allocation of capital under the theme of speculation. This isn’t necessarily bad, as it means people understand the primary utility of Bitcoin is that it is immune to monetary and fiscal manipulation that runs rife today. However, Bloomberg reports that the reason for heavy derivative trading is the ability to use high leverage and reduce capital intensity, October 22, 2019.
Derivatives Continue to Dominate
In a thorough analysis of each exchange, it has been revealed that platforms that have derivatives and spot trading facilities see a massive capital skew to derivatives – Global Bitcoin derivative volumes range between 10 – 18 times more than that of spot trading.
Binance recently launched its futures offering and has been welcomed with a grand reception of almost $500 million in futures per day, but BitMEX is still the leader in this domain. For how long, we can’t ascertain, given Binance has announced 125x margin in an industry ravaged by a gambler’s mindset.
OKEx launched its derivatives platform this year and has already seen volumes double compared to its spot exchange. Circle spun off Poloniex so it can’t independently set up shop in Asia and launch a derivatives exchange. According to CEO Jeremy Allaire, U.S. regulations are too suppressive and cumbersome for a cryptocurrency derivatives platform.
The use of exorbitant leverage is quite concerning. Considering the core premise of Bitcoin was to escape the over-leveraged markets ruined by greed, Bitcoin seems to be moving in this very direction. It appears that human nature cannot be suppressed, but to be fair, this is how a financial market thrives.
Volatility is a Central Reason
Cryptocurrencies are incredibly volatile, and this is the reason speculators prefer derivatives over spot trading. Using leverage, these traders can take a directional position. Spot trading only gives investors the ability to hold a natural long, or sell high and buy back at a lower price.
Derivatives offer a more functional mechanism whereby investors act on their directional bias. Add volatility to this mix, and the equation becomes riskier but more rewarding.
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