Research on the Cryptocurrency Derivatives Market (II) — Overview of Derivatives Exchanges

introduction

In the blockchain industry, with the public's increasing recognition of digital assets, companies that provide digital currency trading services occupy a major position in the entire industry. The existing digital currency exchange industry has developed maturely and the competition is fierce. Looking back on the development path of exchanges in the past few years, its digital currency derivatives sub-field has become a key track for exchanges to exert their strength . Many exchanges have successively launched different contract products and different derivatives gameplay, injecting new vitality into the market.

This article explores exchange companies in the digital currency derivatives market.

3. Development of the Cryptocurrency Derivatives Market

Since the birth of digital currency, exchanges have played a key role in the real world and the virtual world . However, with the development of the trading market, the spot trading market has reached a visible ceiling, and the competition pattern among various companies has been determined. At this time, digital assets are gradually recognized by a large number of investment institutions and investors, and digital currency derivatives trading has become a new battlefield that all exchanges are determined to win.

3.1 Derivatives Market Size

The current digital currency market size has fluctuated from a peak of $800 billion to the current $200 billion after a year of fluctuation. The current total value of the digital currency market is relatively in a stable stage. How big is the market size of digital currency derivatives?

According to the data from Tokeninsight, the spot trading data of exchanges in the third quarter of this year was 4.7 trillion US dollars , which was slower than the growth rate at the beginning of the year. If the currency price is in a downward trend recently, the trading data in the fourth quarter will be basically around 4.5 trillion US dollars . As for the derivatives market, according to the futures trading volume data of various exchanges, it currently accounts for only about 30% of the spot trading volume. Since the trading volume of the options market accounts for an even smaller proportion, it is estimated that the current single-quarter trading volume of the derivatives market is about 1.4 trillion US dollars, and the average daily trading volume is only about 12.5 billion US dollars. The scale of the traditional financial derivatives market is 600 trillion US dollars, which is much larger than the spot market (the spot market only accounts for about 12%) . In comparison, if the digital currency market develops well, without considering the growth expectations of currencies such as Bitcoin, the future of the derivatives market still has a lot of room for imagination. Moreover, the entire derivatives market has been gradually developed mainly since 2018. According to skew's statistics, the market size in 2018 has grown rapidly and is 10 times that of 2017. It can be expected that the market size will further increase rapidly in 2019, and this market will meet the growing investment needs of investors.

3.2 Timeline of derivatives launches on various exchanges

By reviewing the time when each exchange launched derivatives, we can better examine the development of digital currency derivatives.

Let’s first look at the main exchanges:

BitMEX (Bitcoin Futures Exchange): Launched in 2014 ; as the earliest established Bitcoin futures exchange, it ranks first in the world in terms of trading volume, has a deep market, low transaction fees, and good security measures

OKEx (OK): 2014 ; the second largest comprehensive exchange in the world in terms of futures trading volume

BitFlyer : 2014 ; Japan’s No. 1 exchange by trading volume

Bitfinex : January 2016 ; one of the world's largest Bitcoin exchanges

CBOE (Chicago Board Options Exchange): December 10, 2017 , delisted this year

CME (Chicago Mercantile Exchange): December 18, 2017 ; As the world's largest and oldest futures exchange

MXC (Matcha): June 2018 ; known for its 100x increase in value and fast listing

Deribit : August 2018 (perpetual contract); a Dutch exchange focusing on digital currency futures

BHEX : November 2018 ; New exchange

Bybit : December 1, 2018 : Focus on perpetual contracts, rapid development

Huobi DM : On December 10, 2018 , one of the world's largest comprehensive exchanges, the contract market counterattacked

Binance : September 13, 2019 , one of the world's largest digital currency exchanges

Bakkt (sister exchange of the NYSE): September 23, 2019 ; US regulatory compliance, physically delivered

Since there are so many exchanges, I have roughly listed some exchanges that have received more market attention in the above timeline.

In terms of time, the development time of derivatives exchanges is related to the fluctuation of coin prices, especially since many exchanges were launched in 2014 and 2018, and there is a certain lag with the market. The rising trend of the digital currency spot market has driven exchanges to launch derivatives, meeting investors' investment needs for digital currencies when the spot market is no longer rising rapidly or is falling, so as to give play to the hedging and speculative attributes of derivatives. For the development of exchanges , it is obvious that in the past two years, after the big exchanges have finished fighting in the spot market, they will shift their focus to the derivatives market. Emerging exchanges have also continued to appear in 2018, and traditional financial institutions have also entered the market early at the end of 2017.

4. Overview of Cryptocurrency Derivatives Exchanges

4.1 Overview of derivatives market exchanges

Existing digital currency derivatives exchanges are mainly divided into several categories : 1. Exchanges that mainly focus on single products such as futures and options; 2. Exchanges that have both products; 3. Exchanges that deliver physical goods, etc. As can be seen from the above figure, the derivatives transactions launched by many exchanges are mainly futures transactions, while options transactions are rare , and they are mainly small-scale foreign exchanges. For the futures industry, there are both leading exchanges that were famous for futures products in the early days, comprehensive exchanges that have performed well in the spot market in the past two years, and emerging exchanges that want to use the derivatives market as a breakthrough. Just put these companies here, and you can feel how fierce the competition is. However, the entry of companies and the competition in the industry will intensify the emergence of high-quality exchanges, making derivative products more flourishing and the industry more compliant and legal.

4.2 . Transaction scale of derivatives on mainstream exchanges

As the Bitcoin market rebounds this year, the futures market of digital currencies has been very lively. Compared with the futures market in the first half of the year, the entry of Bakkt and Binance has undoubtedly made the competition in the derivatives market of mainstream exchanges more intense. So how big is the scale of mainstream derivatives exchanges so far?

This part of the study mainly selected the Bitcoin futures trading volume of mainstream exchanges such as BitMEX, OkEX, Huobi, and Binance . Since Bitcoin futures trading accounts for more than 60% of the entire futures trading market, the study mainly used Skew's Bitcoin futures trading data.

Bitcoin Futures Volume Chart

Through Skew's futures data, we can see that OKEx has surpassed the largest futures exchange BitMEX , and has recently surpassed BitMEX's Bitcoin futures trading volume for many consecutive days, taking the top spot in derivatives exchanges. Huobi and Binance followed closely behind, and the trading volume of these four companies accounted for more than 75% of the entire market, with an average share of 27% for OKEx, 23% for BitMEX, 17% for Huobi, and 9% for Binance. In the front , OKEx, BitMEX and Huobi are "three-legged" fiercely competing for the top spot, and Binance and other new forces are closely catching up. The market competition pattern has been initially formed. Through CoinMarketCap's spot trading statistics, it can be seen that the spot trading data of Binance, Huobi and OK are basically similar, but Binance is still ahead of the other two. Therefore, Binance has further expanded its territory in the derivatives market through its accumulated spot user base, and has caught up with the pace of the first echelon in this field in just a few months. Emerging exchanges such as Bybit are not counted in the above figure, and these exchanges have also performed well in the recent period.

Source: CoinMarketCap

BTC futures trading volume of mainstream exchanges in the past month

Using Skew's data, we can conduct a simple analysis of the futures trading data of mainstream exchanges. As of December 18, the trading volume trends of various exchanges in the past month are basically the same, especially the trading volume data of OKEx , BitMEX and Huobi are relatively stable, and their respective market shares are relatively stable. The trend of trading volume is also highly correlated with the change of currency prices, which rises first and then falls. Although Huobi and Binance Futures were launched later, their trading volumes have quickly caught up with the top exchanges, but Binance's trading volume data fluctuates more than other exchanges, and whether it can stabilize its market share remains to be seen. Bybit and Binance's rapid catch-up is mainly due to their good user experience , the influence of the Binance brand, and the diversion of spot market users .

4.3 Comparison between digital exchanges and traditional exchanges

If we compare the traditional exchange CME and the new futures trading force Bakkt in the above figure, there is an order of magnitude difference in trading volume . Both the trading volume and the open interest have fluctuated and declined from September to December. Compared with the head exchanges, the futures contract products of the CME exchange are at a disadvantage due to the high margin ratio, low leverage multiples, high trading threshold, few tradable varieties, and large single contract amount , resulting in a large gap in market share. The reasons for this are actually related to the positioning of the CME exchange. The main service objects of the head exchanges are individual investors, while CME is professional institutional investors . Through the changes in the currency price, the transaction amount has also changed, indicating that there are more institutional investors.

4.4 . What does Bakkt bring to the industry?

The launch of Bakkt is the hottest topic in the entire industry this year. On the one hand , people want to see to what extent the scale of exchanges using physical delivery will grow in the future and what impact it will have on the currency price; on the other hand , since Bakkt was launched by the Intercontinental Exchange (ICE) and has been approved by the Commodity Futures Trading Commission (CFTC) and the New York State Department of Financial Services, it is no exaggeration to describe it as "well-established". Most practitioners are looking forward to the comprehensive legalization of digital currency and are full of confidence in the development of the industry.

After two months of testing, although Bakkt's trading volume is far from the top exchanges, it has gradually increased, which has given many people a shot in the arm. Especially for many institutional investors, Bakkt's full license for the three important steps of trading, clearing, and custody is of great significance for attracting funds to enter the market. In the future, funds and institutional investors will be able to enter the digital currency market with confidence. This compliant exchange provides a ready-made case for other exchanges to follow the path of compliance . The benefits of physical delivery have been mentioned in the first article. As the trading volume continues to increase, the price of Bitcoin will change and will be directly related to futures trading.

Just this month, Bakkt launched two new Bitcoin investment products: Bakkt Bitcoin (USD) Monthly Options and Bakkt Bitcoin (USD) Cash Settled Futures. It is clear that Bakkt and CME will provide the entire market with a basic market framework through the launch of compliant derivatives, enhance the liquidity of the crypto market, and attract institutional investors to enter the market. In addition, Bakkt has also launched a number of applications to help consumers use Bitcoin to purchase goods, and Starbucks will be the first partner. Bakkt can attract more users through this application, improve the properties of Bitcoin as a currency, and establish a viable small-amount Bitcoin payment system.

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