Futures and options help investors to bet a small portion of the trade's value that prices will rise or fall to a specific level within a given time frame. It can boost traders' profits by authorizing them to borrow more money to add to their positions, but it can also greatly increase their losses if the market moves against them.

Despite the fact that the market for crypto derivatives is expanding, the instruments and infrastructure supporting it are less developed than those in traditional financial markets.

Because infrastructure has been built and enhanced, and an increasing number of institutions are getting more involved, this year will see crypto derivatives reach a new level of growth and market maturity.

2023 Growth of crypto derivatives

The volume of crypto derivatives will continue to grow in 2023 due to two factors: first, the expansion of relevant infrastructures, such as applications for decentralized finance (DeFi), and second, the entry of more professional and transparent intermediaries. This will someday lead to more institutions getting involved.

Understanding why traditional financial institutions prefer derivatives over traditional spot markets is a great way to learn more about the market.

Some of the reasons for the growth include the ability to leverage capital, the fact that derivatives contracts in the United States are taxed as long-term capital gains, and their use in hedging, which is the capacity to safeguard against unpredictable price swings.

When more institutions partake, relative volatility falls, creating a better use of capital for derivatives trading. Furthermore, as more institutions include crypto assets on their balance sheets, derivative instruments will emerge as an important tool for mitigating short-term volatility.

The industry is still in its infancy

Like 2022, 2023 is predicted to be a landmark year for crypto derivatives. There will be an increase in centralized and decentralized options infrastructure and the continued development of new crypto primitives such as structured vaults, everlasting options, and derivative experiments.

The cryptocurrency sector is moving deeper into regulated markets as it tries to gain more users and participates with existing traditional finance companies, such as brokerages that already allow people to trade stocks and other financial assets.

Large firms will continue to acquire small licensed derivatives operations. It's getting more difficult to tell the difference between retail and institutional markets. The retail-focused companies that crypto exchanges purchased are run by some of Wall Street's largest and most successful firms.

Decentralized derivatives markets are expanding

Perpetual futures, like centralized venues, account for most decentralized derivatives volume. The daily volume of decentralized perps averages $3 billion per day, led first by Perpetual Protocol and now by dYdX.

Despite strong growth, decentralized perpetual volume accounts for less than 5% of total crypto derivatives volume. We anticipate significant growth in this segment over the next two years.

The value of the platforms that support decentralized perpetual swap protocols will increase as more projects and protocols are built on top of them. Along with decentralized futures, options, and structured products, market participants will be eager to see the development of more crypto-native innovations, such as everlasting options.

Derivatives may entice more traditional investors

Institutional traders prefer these instruments because they can provide stable returns similar to fixed income, and these trades are executed using strategies such as bull call spreads and covered calls. Furthermore, institutional traders can merge calls and put options to set a risk limit for options trades without risking liquidation.

Retail and institutional traders benefited greatly from derivatives during the 2020-2021 crypto bull market. Borrowing money and using derivatives is the simplest way for many investors to increase their bets on a range of positions. 

They can be used in stocks, currencies, and commodities, but their popularity in cryptocurrencies has risen steadily since 2017.

How might more complex derivatives be created to help crypto traders manage their risk? Let us know your thoughts by sharing this article on social media.

Jan 7, 2023
Digital Lifestyle

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