All summer long, the hottest headlines in cryptocurrency have been about derivatives. As the price of BTC started to climb, BitMEX and CME both announced they were experiencing record trading highs on perpetual swaps and cash-settled futures. Binance has now launched not one, but two, futures trading platforms. Most recently, ICE launched physically-settled futures via Bakkt.
The regulated crypto space has also made other headlines in the last week after CME announced it would be launching cryptocurrency options. Institutional players will be able to start trading from early next year. CME cornered the market in regulated bitcoin futures trading after its competitor CboE withdrew in March. Now, it looks set to cement its domination with the new offering.
Disrupting the Status Quo?
What does this mean for the existing market for cryptocurrency options? Well, whereas players such as OKEx, BitMEX, Cryptofacilities, and Bitfinex have long been offering futures trading, the cryptocurrency options market is in a significantly more nascent stage of development.
As things stand, the Dutch trading platform Deribit by far the market leader in offering crypto-backed options. These are European-style options based on either BTC or ETH, settled in cash at the point of expiry. Deribit has certainly maximized its first-mover advantage, as it reportedly accounts for 95 percent of crypto options trading. This has led to the platform receiving – and turning down – bids for equity that number into the hundreds of millions. But should it be worried about CMEs new venture?
Not really. The CME offering is slightly different from Deribit options, which are based on BTC or ETH. CME intends to offer “options on bitcoin futures,” where the underlying asset is not bitcoin, but a bitcoin futures contract. Options on futures are a more sophisticated type of “derivative of derivative” instrument already used widely in the traditional financial markets. CME does a roaring trade in options on futures covering various markets, with daily volumes above 100,000 contracts traded for its top ten instruments.
To date, CME has seen a 250 percent year-on-year increase in BTC futures contracts since they launched in 2017. No doubt the exchange is hoping it can replicate this success with options on bitcoin futures.
Deribit’s CEO certainly doesn’t appear to be daunted by CMEs entry into the cryptocurrency options space. Speaking of the announcement, COO Marius Jansen told us:
“CMEs decision to move into the bitcoin options market represents a positive step for crypto derivatives overall. It demonstrates that there is an increasing institutional appetite for different types of crypto-backed financial instruments.”
“The more closely that the cryptocurrency markets mirror the kind of products available on the traditional markets, the better to boost liquidity and drive further growth. Deribit has always known there’s a strong demand for cryptocurrency options, and CMEs decision only supports this view.”
Jansen’s pragmatic response also takes in the bigger picture benefits of an increasing institutional interest in cryptocurrency. Higher levels of institutional interest are only increasing buoyancy for the cryptocurrency markets. This liquidity is evident in the record low levels of volatility in the price of bitcoin over recent months.
Given that US traders can only purchase international options from exchanges like Deribit via intermediaries, it seems more likely that CME Group will open up new channels of liquidity within the US. For that reason, Deribit is unlikely to see any significant impact on its current trading levels. In contrast, the overall cryptocurrency markets only stand to benefit from increased liquidity.
One BTC to Rule Them All?
It may also be the case that CME and Bakkt’s new offerings combined serve to further cement the dominance of bitcoin. Having taken a beating during the altcoin boom of 2017 and 2018, Bitcoin is currently enjoying dominance levels unseen in the last two years. If institutional money continues to flow into the world’s first cryptocurrency, it’s possible BTC dominance could return to pre-2017 levels of eighty percent or even more.
One thing is for sure. The regulated crypto-derivatives market is now firmly established as a part of the overall financial landscape. Perhaps finally, the days of speculating whether Bitcoin is dead are now well and truly behind us.