Crypto derivatives can foresee price action but need institutional buzz to truly shine

The cryptocurrency market has been in a state of panic, with most tokens in the cryptoverse experiencing a price slump since the beginning of December. According to data from Cointelegraph Markets Pro, Bitcoin (BTC), the flagship cryptocurrency token, experienced a sudden crash on December 4. The price of the token dropped below $50,000 in just two months.

As the cryptocurrency market became more red, this phenomenon was evident among most of the tokens. Ethereum and Ether (ETH), became the network and token choice for a majority decentralized finance (DeFi), protocols. Ether saw a 19% price fall.

BTC and ETH have a strong futures and options market, which could have helped to foresee this price decline for these tokens.

In conjunction with the Dec. 4 price crash, $950 million worth BTC options were expired. The bears held the advantage over bulls, even though the price was $57,000 at that time. It was evident that the options data prior to the expiry showed a bias towards market forces being bearish, with a large proportion of put options below $57,000. A put option is a contract which gives the owner of the option the option to sell the underlying asset at a predetermined amount.

A call option is one where the option holder can buy the underlying assets at the same price. The market sentiment for the underlying asset is strongly reflected in the ratio of put options to call options that lead up to expiry. This case showed that the market sentiment was strongly bearish, even though it was only a week prior to expiry.

The forces at play

Luuk Strijers is the chief commercial officer at Deribit’s crypto derivatives exchange. He spoke to Cointelegraph about signs in derivatives data that suggested a crash.

“Prior the weekend correction, there was a spike of IVs possibly due to post-expiry-related selling. We saw risk-reversal strategies traded (Sell OTM call + Buy OTM put).

The expiration date of an option is the date that the option holder has to decide whether to execute the buy/sell order of the asset or forfeit the option. These events can have significant consequences on the price dynamics of the asset. In this instance, it is Bitcoin.

Strijers expressed concern about the effect of this expiry on BTC. He said: “It’s difficult to know for sure.” But, people are more aware of expiry dates and open interest at key strikes, which increases the importance of larger expiries.

Adam James, senior analyst with OKEx Insights (the research arm of OKEx), spoke to Cointelegraph about the signs leading to the crash. “The most obvious indicators that a crash might be imminent were the extremely high open-interest and positive funding. These two factors don’t always bode well and often require an flush.”

“The cascading sale-off that we witnessed on Saturday was exactly that flush. The weekend order books were thin, making it easy to steamroll longs with excessive leverage and cause an OI reset. The crash was, as it turned out, one of the most capitulating events in Bitcoin’s history.

This phenomenon is an indicator that the prices of the underlying assets are closely related to the derivatives markets, but it does not reflect the size or the extent of the spot market.

Institutional investors could prove to be a game-changer

It is a small fraction of the spot market and current market capitalization for these assets, considering the derivatives markets for top cryptocurrency tokens BTC and ETH.

Open interest (OI), for BTC options, has increased more than tenfold since July 1, when it was nearly $1 billion. It now stands at $11.4 billion as of this writing. On Oct. 20, the OI reached an all-time record high of $15.72 trillion. BTC reached an all-time record of $68,789.63 in Nov. 10, shortly after.

It is clear that cryptocurrency options are still in their infancy and play an important role in price discovery and forecasting. Similar results can be observed when looking at OI data for ETH.

Cointelegraph spoke with Igneus Terrenus about the size of crypto options markets. He said that it was comparable to Robinhood’s options market for stocks or the options market for commodities. “What is currently available in crypto options market seems inadequate for institutional and retail traders.”

Institutional investors could make a significant impact on the cryptocurrency derivatives market, allowing for exponential growth in liquidity, size and depth. Goldman Sachs, an investment banking giant, saw the cryptocurrency options market as the next frontier in institutional adoption of crypto. Wall Street bank announced plans to expand their crypto trading desk in order to also engage with BTC derivatives and ETH products.

Strijers said that institutional investors entering the crypto derivatives market are a slow process due to Know Your Customer (KYC), due diligence and due diligence. He stated, “In November we had onboarded more institutional customers than any month before — The larger the firm, and the longer the mutual-onboarding process.”

“Now, these large clients have an extensive platform as well as a due diligence process, especially those offering third-party asset management, such the multi-billion dollar macro fund.

Altcoins are playing catch-up

Currently, the liquid options market exists for BTC/ETH only on several cryptocurrency exchanges such as Deribit, LedgerX OKEx FTX and Chicago Mercantile Exchange CME. This is the largest global derivatives exchange for traditional asset classes.

There are no products for popular cryptocurrency tokens such as XRP (XRP), Solana(SOL), Binance Coin/BNB, Polkadot/DOT, and many more, even though they have a liquid spot market and even futures markets.

Strijers elaborated further on the reasons behind this scenario. “We plan to make SOL product available soon. It remains to be seen if it will go beyond that. We need market maker coverage at all times, even Sunday evenings, and in all strikes or expiries. We cannot rely on just a few market makers. We need many more.

Related: The market for cryptocurrency derivatives is growing despite regulatory FUD

There is a liquid futures marketplace that can be traded for many of the most popular cryptocurrencies. This includes the meme coin Dogecoin and the native token of Axie Infinity’s nonfungible token (NFT). Despite the longest bull run the ecosystem has ever seen, the OI for futures-based tokens products hasn’t even reached $1 billion.

SOL is the token with the highest OI for futures, surpassing BTC and ETH. It stands at almost $870 million as of the time this article was written. Next is DOT with an OI at $573 million and BNB with a $521 million.

The spot market capitalization for all these altcoins is over $50 billion. This means that the futures market for these tokens represents only a small portion of their total market capitalization. Although there is a liquid market for these assets, it is too small to have an impact on the price. However, they play a part in price discovery.

The institutional and retail adoptions of cryptocurrency are growing rapidly. This will mean that they will be more involved in the derivatives market, especially if institutional giants Grayscale get involved in pushing the market for pricing and market efficiency for these assets.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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