A recent Q2 2023 report from Genesis Trading indicates an imminent significant expansion in crypto-derivatives fueled by a drastic decrease in spot market liquidity and a trend towards using derivative instruments. In Q2, even as the BTC price fluctuated between $27,000 and $30,000, 20 crypto exchanges posted $1.67 trillion in total spot trade volume – a 36% slump from the previous quarter. This downfall underscores the liquidity issue in the crypto market, thus advocating the need for crypto derivatives.
Several factors orchestrated this market plunge, including the Bitcoin ETF filing and the significant role played by the Securities and Exchange Commission (SEC) in transforming market dynamics. Key to note, allegations of trading unregistered securities against Bittrex significantly affected spot trading, leading to a substantial activity decrease.
Moreover, SEC’s regulatory scrutiny on major actors in the market like Binance US, Binance, and Coinbase accused of practicing unregistered securities only served to amplify the decline in spot trading activity. This resulted in spot trading volumes hitting 2020 lows, a serious liquidity loss in the top 10 tokens due to SEC action, and a liquidity decrease of 68% in Bittrex.
But it’s not the shadow of SEC’s regulations only. Other major platforms like Coinbase, Kraken, OKX, and Huobi saw over 50% decline in their spot trading volumes during Q2, indicating that market fluctuations are a complex interplay of multiple factors rather than being the result of only one.
Another outcome of this shift is the expanding crypto derivatives market, driving institutional adoption amid regulatory uncertainty. Market participants actively seek alternatives amidst the spot market liquidity crisis and regulatory ambiguity. The growth potential of a robust crypto derivatives market cannot be overlooked, as it can considerably speed up global institutional uptake.
Encouraging signals for such expansion come from established financial institutions. These institutions are increasingly moving towards crypto, signaling recognition and credibility, making the crypto derivatives market set to expand tenfold as per the Genesis report.
Highlighting the fact that for the first time in 2021, the notional volume of US equity options exceeded the traded value of underlying equities, the report suggests that the crypto options market could grow 10 times from its current levels.
The crypto derivatives space has seen several critical developments in Q2 2023. For instance, Deribit set a new record trading the highest number of option contracts within 24 hours this year. Parallelly significant was Coinbase’s introduction of institutional-sized fixed-date and perpetual futures in June, aligning with Bitcoin’s resurgence beyond $30,000, which draws an incontrovertible link between price movements and derivatives activity. Another landmark was at the Chicago Mercantile Exchange (CME), where derivatives volumes surged by nearly 25% in July to hit approximately $1 billion.
Source: Cryptonews
