How Do Derivatives Drive New Entrants Into the Crypto Market?

This article was first published on Insights – Ripple
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Ten months into the pandemic and COVID-19 continues to negatively impact global markets. However, trading of crypto derivatives is on the rise. The crypto market is maturing as applications of real-world solutions and new financial products drive global adoption. Meanwhile, the volume of trading is surging as traders view crypto as one of the better inflation hedges—and derivatives, specifically, are desirable due to their ability to manage risk and generate returns.

Derivatives are a foundational building block for every market development cycle, and with the increased popularity of crypto trading, it’s an important topic to understand. 

A History Lesson in Derivatives

Counter to traditional financial markets, derivatives launched before initial margin was widely mandated in the crypto industry—which traditionally serves as a prerequisite for the launch of derivatives. Derivatives ultimately rely on leverage to enter positions and a widely developed lending/margin system is necessary. The fact that derivatives came out prior to margin trading is just another example of how the crypto space has evolved differently and faster than traditional financial markets. 

It has been just three years since the launch of crypto futures contracts by the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), which marked a strategic decision from two major institutions that cryptocurrency derivatives represented long-term potential. 

When Bitcoin first began trading on the CME and CBOE, the initial margin—the amount of collateral a trader must proffer to trade a contract—was set at 43% for the CME contract and 44% for the CBOE contract. Margin levels are subject to change and, because of bitcoin’s volatility, were set higher than for other popular futures contracts.

In the years following the launch, increased trade volumes across trusted exchanges are growing in parallel with trading products that are ready to support the maturation of ...

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