Trading in cryptocurrency spot markets may have cooled off but the market for bitcoin derivatives is heating up.
Investment management firm VanEck announced a partnership with Nasdaq for a “regulated crypto 2.0 futures type contract” product at the Coindesk Consensus Invest event yesterday. Singapore-based digital asset exchange Huobi today announced its foray into derivatives with the beta launch of Huobi Digital Marketplace (HBDM).
Joshua Goodbody, General Counsel of Huobi’s Global Institutional Team, stated their product was targeted at a “rapidly expanding and maturing market” for cryptocurrencies today. According to him, traders were looking for a “broader range of investment tools than has been traditionally available”. He said the exchange plans to add contracts for ether, litecoin, and EOS in the future. Chris Lee, vice president of business development for Huobi, said 20% of the revenue earned from the derivatives marketplace will be used to buy back Huobi tokens.
The initiatives are in addition to a spate of notable earlier announcements from the likes of ICE and Nasdaq to develop derivatives products for cryptocurrency markets. HBDM is currently in beta and is not available to users in the United States.
More of The Same?
In a press release, Huobi touted its insurance fund consisting of 20,000 BTC and a circular break mechanism to avoid unnecessary forced liquidations as distinguishing factors from other venues for derivatives trading. The face value of a BTC contract at Huobi is $100 and its minimum tick size, or price movement, is set for $0.01 for bitcoin contracts. The exchange’s contracts are settled on a weekly, biweekly, and quarterly basis.
In the structure and terms of its derivatives contracts, HDM is not much different from established exchanges. But Huobi has a bigger spot market for cryptocurrencies and more retail investors at their exchange, Ricky Li, co-founder of Altonomy – a cryptocurrency trading firm, points out. That may not matter much in the long run, however. “In the end, derivatives contracts are not really supposed to be played by retail users,” explains Li.
Will it Make A Difference?
Such contracts typically are used by institutional investors and cryptocurrency miners to hedge risk. To that extent, the recent slew of announcements is expected to attract more institutional money and liquidity into the cryptocurrency ecosystem. That money will not have a material impact on bitcoin’s price, which has been in a slump for most of this year. As of this writing, bitcoin was trading at $4,112 per pop. Till date, the cryptocurrency is down by 70 percent from its peak price of $13,412 during the first week of this year.
Li says the launch of ICE’s Bakkt, which plans to offer physical settlement of contracts, and Nasdaq’s bitcoin futures will have a “massive impact” on the market because it would signal the entry of regulation and sophistication in delivery systems into a Crypto Wild West. “That will be a very, very positive signal to investors who have a responsibility to effectively hedge their positions,” he said.
Bitcoin derivatives trading shot up in Asia after a run up in its prices last year. Some accounts even blame skyrocketing prices for the cryptocurrency on the flow of money into bitcoin derivatives. For example, Japan-based exchange bitFlyer said it had 25 percent of its trades in bitcoin and 75 percent in derivatives of the cryptocurrency at the height of bitcoin mania last year. More recently, bitcoin’s slide below $6,000 triggered stop-loss orders at BitMex, a Hong Kong-based firm which is considered the world’s biggest cryptocurrency exchange, and OkEx in China. “That (the orders) exaggerated the downturn in spot markets because trading systems force liquidation of contracts,” says Li.