HashKey: Understand the current status, trends and challenges of cryptocurrency derivatives

Written by: Lin Buren, working at HashKey Capital Research

Reviewer: Zou Chuanwei, Chief Economist of Wanxiang Blockchain, PlatON

This article mainly introduces derivatives in the cryptocurrency market and sorts out their development status. Among them, leveraged trading has been gradually replaced by other derivatives; perpetual contracts have rapidly developed into the current mainstream derivatives; option contracts are still in their infancy due to liquidity reasons; leveraged tokens continue to innovate but trading platforms are limited.

In the future, cryptocurrency derivatives exchanges need to solve and overcome many technical difficulties and user fund security issues. Regulatory policies need to be introduced as soon as possible to standardize derivatives to protect user rights. At present, the cryptocurrency derivatives market is still in the early stage of development, but the future development space is huge.

Since the birth of Bitcoin, the entire cryptocurrency market has undergone more than ten years of evolution and development. Generally speaking, as a new type of asset, cryptocurrency has a higher volatility than various products in the traditional financial industry (such as securities, commodities, foreign exchange, etc.), and it is accompanied by extremely high risks. With the gradual improvement and maturity of the cryptocurrency spot market, users’ demand for cryptocurrency transactions is no longer limited to simple spot transactions. Major cryptocurrency exchanges have begun to gradually introduce various derivative products.

The following will mainly introduce the situation of traditional financial derivatives to elucidate the introduction, function and role of derivatives in the cryptocurrency market, and comb the current development status of derivatives in the cryptocurrency market, as well as the future development of derivatives in the cryptocurrency market. Summary of trends.

Traditional financial derivatives

Financial derivatives is a collective term for a special category of financial instruments bought and sold. The value of this type of derivative product depends on changes in the value of its underlying financial assets. Such as assets (commodities, stocks or bonds), interest rates, exchange rates, or various indexes (stock index, consumer price index, and weather index). The performance of these elements will determine the rate of return and return time of a derivative. The product form is expressed as a contract signed between the two parties (the buyer and the seller) and executed in accordance with the contract requirements within a specified time.

Derivative type

Forward contracts and futures contracts

Forward contracts and futures contracts are both trading forms in which the two parties agree to buy or sell a certain quantity and quality of assets at a certain time and at a certain price in the future. The futures contract is a standardized contract formulated by the futures exchange, which has unified regulations on the expiry date of the contract and the type, quantity and quality of the assets bought and sold. A forward contract is a contract signed by the buyer and the seller based on the special needs of the buyer and seller, and is an over-the-counter transaction. Therefore, the liquidity of futures trading is high, and the liquidity of forward trading is low.

Contract transactions in the cryptocurrency market evolved from these two contracts. Due to the particularity of assets such as cryptocurrencies, cryptocurrency exchanges have innovated traditional contract products and derived unique cryptocurrency markets. The following will focus on the perpetual contract.

Swap contract

A swap contract is a contract for the two parties to exchange a certain asset in a certain period in the future. More precisely, a swap contract is a contract between the parties to exchange cash flows that they believe to have equal economic value within a certain period in the future.

Swap contracts are generally mainly used for foreign exchange transactions between banks and companies to hedge or arbitrage between import and export commodities, so they are not suitable for the cryptocurrency market.

Option contract

An option contract is a transaction of buying and selling rights. Option contracts stipulate the right to buy or sell a specific type and quantity of native assets at a specific time and at a specific price. According to the wishes of the option buyer, options can be divided into call options and put options. Option contracts provide investors with a broader range of investment options, and adapt to the needs of investors for more diverse investment motives and interests. Generally speaking, they are used as a hedging method to reduce risks for investors.

At present, major exchanges in the cryptocurrency market have gradually introduced option contracts, and their trading logic is almost the same as option contracts in the traditional financial industry.

Derivatives transaction subject

Assets in the traditional financial market are relatively diversified, and the trading targets of derivatives are stocks, interest rates, exchange rates, commodities, indexes, etc. In the cryptocurrency market, the price of tokens is the main asset, and individual exchanges will innovate the target of derivative products, including some sector indexes, volatility indexes, etc. With the growth of the cryptocurrency market, the subject matter has a tendency to gradually increase.

Derivatives trading venue

There are two main types of derivatives trading venues, on-exchange trading and over-the-counter trading. Floor trading is also called exchange trading, which refers to the way that all supply and demand parties concentrate on the exchange for bidding transactions. In this trading method, the exchange collects margin from trading participants, and is also responsible for clearing and assumes the responsibility of performance guarantee. The centralized trading of all traders increases liquidity. Futures contracts and some standardized option contracts belong to this type of trading. Derivatives trading in the cryptocurrency market is mainly in this way. Exchanges can ensure liquidity and provide users with convenient and fast trading needs.

Over-the-counter trading, also known as counter trading, refers to a trading method in which both parties to the transaction directly become counterparties. This transaction method can design different products according to the different needs of each participant, which can meet the different transaction needs of users and each contract is unique. The clearing step is carried out by the two parties responsible for each other, which requires a higher level of user credit.

Derivatives are a complex financial instrument that can bring users different investment methods and purposes. The combination of derivatives and cryptocurrencies increases the threshold for users to use. For inexperienced lay investors, derivatives will be more difficult to manage and operate.

Introduction to cryptocurrency derivatives

At present, the mainstream derivatives in the cryptocurrency market include: leveraged trading, futures contracts, option contracts and leveraged tokens. Among them, some cryptocurrency exchanges do not classify leveraged trading and leveraged tokens as one of the derivatives, but these two trading methods that are different from spot transactions do bring diversified operations to users and can reach the derivatives market. Achievable effect. Therefore, this article classifies it as one of the derivatives.

Leveraged trading

Leveraged trading is a way of using funds provided by a third party for asset trading. Compared with regular spot transactions, leveraged transactions can allow users to obtain more funds, amplify the results of transactions, and enable users to obtain greater profits in profitable transactions.

In traditional financial markets, leveraged trading is generally called margin trading, and the borrowed funds are generally provided by stock brokers. However, in the cryptocurrency market, borrowed funds are usually provided by other users on the exchange. Fund providers earn interest by placing assets in exchanges, users who borrow assets through leverage pay interest on leverage, and exchanges act as intermediaries to allocate assets and obtain commissions from them.

Margin trading can be used to open long and short trades. Longs can borrow stablecoins to buy cryptocurrencies, reflecting the user’s expectations for asset price increases; while shorts borrow cryptocurrencies to immediately sell and buy back the corresponding currency after the market drops, reflecting the opposite of longs. When using leveraged trading to open a long or short position, the trader’s assets will serve as collateral for the borrowed funds.

At present, the leverage multiples provided by mainstream exchanges are 2-10 times. The so-called leverage refers to the ratio of borrowed funds to margin. For example, to open a 5 times leverage ratio to trade 50,000 US dollars, users need to pledge 10,000 US dollars in margin. When the user’s opening direction is opposite to the market trend and the market fluctuates sharply, and the total assets of the user’s margin account are lower than the minimum margin requirement for leveraged trading, the exchange will force the sale of the user’s mortgaged assets to close the position.

The advantage of leveraged trading is to open leveraged trading of multiple currencies through less investment cost, thereby bringing higher returns to investors. Compared with spot trading, which can only buy and do long, leveraged trading provides investors with short-selling opportunities and can make profits when the market is down. But when the user makes a wrong judgment on the market direction, leveraged trading will also bring serious losses to the user. High leverage borrowing also means that small fluctuations in market prices may also make users’ margins all lost.

Due to the risk of liquidation in leveraged trading, individual exchanges provide users with the functions of full position leverage and position-by-position leverage. Cross position leverage is a leveraged transaction that supports all trading pairs in the account, and the assets in the account are mutually guaranteed and shared. Once liquidation occurs, all assets under the account will be liquidated. Margin leverage means that each trading pair in each account has an independent position, and the risks of each margin account do not affect each other. Once a liquidation occurs, it will not affect the rest of the account.

In general, the warehouse-by-warehouse leverage function has a stronger awareness of risk control for users’ overall positions, and can isolate the risks of different assets from each other, but users need to always pay attention to the margin conditions of different loan assets. The whole position leverage function is conducive to the risk control of a single asset. Compared with each position, the centralized sharing of margin can better buffer the liquidation of a single currency, but the extreme market situation of a certain asset may cause all The positions are closed.

Futures contract

As an earlier derivative product launched in the cryptocurrency market, futures contracts are also the derivatives with the highest trading volume at present. There are two types of futures contracts in the cryptocurrency market: delivery contracts and perpetual contracts.

Introduction to Delivery Contract

The delivery contract is an crypto asset derivative product. Users can determine the rise and fall, choose to buy long or sell short contracts to obtain the benefits of Crypto asset prices. The delivery contracts of mainstream cryptocurrency exchanges generally use a differential delivery model. When the contract expires, the exchange will close all open contract orders. Only a few exchanges such as Bakkt support the physical delivery of cryptocurrency contracts.

At present, the delivery time of delivery contracts in the cryptocurrency market is mostly divided into “current week, next week, and quarter”, and a certain multiple of leverage can be added. At present, mainstream exchanges support a leverage of up to 125 times. In a market with volatile market, the risk of liquidation is higher.

Introduction to Perpetual Contract

Perpetual contract is an innovative derivative, which is similar to delivery contract. It’s just that the perpetual contract does not have a delivery date and users can hold it forever.

In traditional financial futures contracts, one party to the contract often needs to hold a contract subject matter (mainly commodities, such as wheat, gold, copper, etc.), and holding the subject matter will increase the contract’s holdings in practice. There are costs, resulting in a larger price gap between the contract market and the spot market. In order to ensure the long-term convergence between the perpetual contract price and the spot price, the exchange basically uses the funding rate method.

Funding rate refers to the settlement of funds between all longs and shorts in the perpetual contract market, which is settled every 8 hours. The funding rate determines the payer and receiver; if the rate is positive, the long pays the funds to the short; if it is negative, the short pays the funds to the long. You can think of this as a fee for the trader to hold a contract position, or a refund. This mechanism can balance the needs of buyers and sellers for perpetual contracts, so that the price of the perpetual contract is basically consistent with the price of the underlying asset.

Almost all mainstream cryptocurrency exchanges have supported perpetual contracts, with leverage up to 125 times. Perpetual contracts are also the most popular derivatives in the market today.

The difference between delivery contract and perpetual contract

  1. The operation of the perpetual contract is simple, and there is no need to consider the steps of delivery and exchange of positions, and it can provide almost the same experience as the spot. For investors, the professional investment threshold is lowered. If the delivery contract is automatically delivered by the system when it expires, a delivery fee must be paid. Compared with a perpetual contract, it is necessary to always pay attention to the delivery time.
  2. There is no delivery time for perpetual contracts, while delivery contracts have specific delivery times such as “current week, next week, quarter”. Investors can hold perpetual contracts for a long time to obtain higher investment income, but it should be noted that there will be fund rate settlement every eight hours. If the holding contract is the fund payer, the assets will cause a slight loss. Due to the rules of the fund rate, large contract traders generally close their positions before the fund rate settlement time to avoid fund wear, and more professional quantitative investors will use the long-short ratio and market conditions to open positions to become the fund rate The beneficiary.
  3. Perpetual contract prices and spot market prices remain relatively high, while delivery contract prices deviate greatly. Due to the funding rate mechanism of perpetual contracts, the contract mark price is always close to the spot price. The farther the delivery contract is from the delivery time, the higher the deviation between its price and the spot price. When the delivery time is approaching, the volatility is often greater due to the increase in the closing transaction volume, which is prone to “pin” phenomenon (pin refers to a certain cryptocurrency) Due to market manipulation and other reasons, the price of the contract quickly rose or fell at a certain point in time, and then quickly returned to the normal price. Although the price has not changed, a large number of positions have been liquidated.).

Forward contract and reverse contract In the cryptocurrency market, forward contract is also called stablecoin contract, which uses stablecoin (USDT) as the margin in the contract. Reverse contracts are also called currency-based contracts, which use currencies as contract margins for corresponding trading pairs.

Derivatives in the traditional financial market are generally forward contracts that are settled by cash, while reverse contracts are innovations in the cryptocurrency market. The use of cryptocurrencies (BTC, ETH, etc.) as collateral for derivatives opening is extremely This has greatly increased the demand for cryptocurrencies in the secondary market and promoted market liquidity.

The solution to wear warehouse

Shortage refers to the fact that the user’s position cannot be liquidated due to liquidity after the user’s contract is liquidated, that is, there is no counterparty in the trading market to match the order. Generally speaking, in this case, the exchange will take over the user’s remaining positions, and this will cause the exchange to receive losses. Major exchanges (such as Binance, Huobi, OKEx, etc.) will set up risk guarantee funds. The risk guarantee funds are designed to make up for the losses caused by the user’s contract asset margin being lower than 0. The additional fees paid by non-bankrupt liquidation users will be Was injected into the risk protection fund. The main purpose of the risk protection fund is to reduce the possibility that users cannot be liquidated.

When the risk guarantee fund cannot take over the positions of cabin users, there are currently two mainstream solutions in cryptocurrency exchanges.

  1. Wear warehouse apportionment. In the settlement of profit and loss on the delivery day, the exchange will aggregate and count the loss of the liquidation caused by the liquidation orders of all contracts, and allocate it according to all the profits of all profitable users.
  2. Automatically reduce positions. The exchange will close the position according to user priority. The priority ranking is calculated based on the user’s profit and leverage. Generally, the more profit, the user with the higher leverage will be liquidated first. The above two schemes achieve the system’s breakeven by reducing the profitable part of the profitable contract. The spreading allocation mechanism will allocate all profitable users, while the automatic lightening is aimed at the most profitable users.

Cryptocurrency exchanges generally list multiple delivery contracts with different delivery times to meet the needs of most users. This will also divert user funds and cause poor liquidity in individual delivery contracts. The liquidity of perpetual contracts is better and the order depth is almost close to that of spot, so the phenomenon of short positions mostly occurs in delivery contracts. Option contract

At present, there are two main types of option contracts in the cryptocurrency market. One type is T-quote option contracts based on the Deribit exchange, and the other is an innovative option contract based on the cryptocurrency market launched by Binance.

T-quote options

The T-quoted option contracts in the cryptocurrency market are almost the same as the option contracts in the traditional financial market. They are all European-style options and can only be exercised on the expiry date. The exchange acts as a securities broker and provides users with a T-type quotation table, which contains transaction information such as the subject of an option contract, expiration date, exercise price, and buying and selling prices. Users can act as option buyers or option sellers.


Figure 1: Deribit option T-type quote table

Simple version of new options

The second type of option products are simple new options (also called short-term options) launched by exchanges such as Binance and Gate.io. Compared with the complex T-type quotation table of traditional options, this type of option product simplifies the trading process to enhance the trading experience. Users only need to select the expiration time of the option and the purchase quantity to purchase an option. The exercise price when placing an order is provided by the exchange in real time. According to the product characteristics of different exchanges, it can be divided into two types: European options and American options. Compared with traditional options, their expiration time range is shorter, ranging from 5 minutes to 1 day. The user can only play an option contract game with the exchange as an option buyer. This type of simple version of the new option has the following characteristics:

  1. High liquidity. Generally speaking, standard option contracts have multiple options for expiration and exercise prices, and have two choices for buyers and sellers. A diversified product structure will also diversify the liquidity of each option contract. The seller of the simple version of the new option is an exchange, which can provide liquidity at any time, so users don’t have to worry about the situation that there is no counterparty due to lack of liquidity.
  2. The operation is simple and easy to use, and it is more user-friendly for novice users. Option is essentially a complex derivative. In-depth understanding of option contracts requires the grasp of the more complex nonlinear relationship between the five Greek letters, and the learning cost and threshold are high. The simple version of the new option has become a very simple derivative tool after being packaged by the exchange, which can be understood as the user’s expected guess of the short-term price of cryptocurrency assets.
  3. The option expiration date is shorter. The expiration date of the simple version of the new option ranges from 5 minutes to 1 day, which is far from the month or even quarter of a traditional option contract. The main users of short-term options are more speculators who make short-term guesses on the rise or fall of the underlying assets, and gambling means more importantly.
  4. The intrinsic value is not transparent. The short-term options packaged by the exchange will not provide users with important option data such as potential volatility, delta, and trading volume, and users cannot calculate the true intrinsic value of the option. The exchange can sell options at a high premium to obtain high profits. The user’s counterparty exchange has a natural advantage in having a large amount of real-time data on the underlying option. At the same time, the exchange can also use T-quotes in other options exchanges Table reverse operations to hedge the risk as a seller. Therefore, the user as the option counterparty of the exchange has to bear a higher risk, even if the price of the option is not reasonable, it cannot be learned from it.

Leveraged tokens

A leveraged token is essentially a token with a leverage function, designed to provide leverage multiple rewards for the underlying asset. Unlike leveraged trading, users do not need any collateral and maintenance margin, nor do they need to worry about the risk of liquidation. Behind each leveraged token corresponds to a basket of underlying positions.

Depending on the product, the real target leverage multiples behind leveraged tokens are different. Leveraged tokens use the exchange’s position adjustment mechanism to increase or decrease the position of underlying assets to maintain the target leverage. From a functional point of view, the role of leveraged tokens is similar to ETFs (Exchange Traded Funds, namely trading open-end index funds) in the traditional financial field.

For example, the leveraged tokens BTCUP and BTCDOWN issued by Binance. BTCUP can realize leverage multiple gains when the price of BTC rises. Conversely, BTCDOWN can achieve leverage gains when the price of BTC falls. The basket of assets corresponding to BTCUP leveraged tokens is 123,456.78 BTCUSDT perpetual contracts. The target leverage of Binance leveraged tokens will remain between 1.5 times and 3 times.

Although leveraged tokens do not require cumbersome operations like ordinary cryptocurrencies, the mechanisms are more complicated and not suitable for novices to participate. There is no case of liquidation of leveraged tokens, but compared with holding spot, long-term holding of leveraged tokens will be affected by daily adjustments and daily management fees, and assets will gradually be subject to fee wear. Therefore, leveraged tokens will give full play to their advantages in the short-term unilateral market. Leveraged tokens will automatically use floating profits to increase the underlying asset positions, making the actual leverage multiples exceed the original leverage multiples to achieve more returns.

The role of cryptocurrency derivatives

Since the development of the cryptocurrency market, derivatives have become one of the indispensable financial instruments in the market. The development and innovation of cryptocurrency derivatives have played a role in promoting the entire market, and its main roles are as follows:


Hedging refers to the use of derivatives by investors to protect their investment portfolios. Use the profits obtained from derivatives to make up for losses in the spot market, or use the appreciation of the spot market to offset losses caused by derivatives to reduce risks.

For example, a large number of bitcoin miners are worried about the future decline in bitcoin prices after obtaining mining profits, so they use the short-selling mechanism of cryptocurrency derivatives to short derivatives equivalent to the expected return and lock in the return in advance. For institutional investors, the use of derivatives such as options and futures contracts for reverse operations can play a role in risk hedging for investment funds and improve the awareness of asset risk control.


Cryptocurrency derivatives provide retail investors with diversified means of speculation, and the provision of high-leverage futures contracts can allow small-capital users to gain greater profits with small capital. But with it comes higher risks. High leverage means that slight fluctuations in asset prices can make users’ capital positions burst.

For most exchanges, cryptocurrency derivatives, especially futures contracts that support high leverage, have become one of the main tools to attract users. Most novice users open a hundred times contract position on the exchange is tantamount to gambling, while professional quantitative trading teams can use market fluctuations for strategic trading speculation, such as grid trading.

Value discovery

In the cryptocurrency derivatives market, if the trading volume and user base are large enough, then derivatives will have a value discovery effect for the asset target. The prices in derivatives often reflect market users’ judgments on the future trend of the underlying asset, which has certain reference significance for the future value of the spot, and can even predict the future price of the commodity market from a certain aspect.

Increase spot trading liquidity

At present, most of the derivatives provided by mainstream exchanges are reverse contracts, which require cryptocurrency assets as margin, and users who do derivatives transactions need to hold a certain amount of cryptocurrency to open positions. In the case of violent market volatility, users must continue to buy cryptocurrencies in the spot market to serve as a margin when making up positions. On the other hand, cryptocurrency assets that are profitable through derivatives trading also need to be traded in the spot market to withdraw gold. Therefore, the linkage between the derivatives market and the spot market is relatively high, and the sharp increase in the trading volume of the derivatives market will also bring about an increase in the liquidity of the spot market.

Current status of cryptocurrency derivatives

 market Overview

At present, most of the cryptocurrency exchanges in the market have launched derivatives trading functions, and the market share of derivatives has gradually expanded. According to CryptoCompare data, the trading volume of cryptocurrency derivatives has reached approximately US$445 billion in July 2020, an increase of 13.2% compared to June; the market share of derivatives in July accounted for 41% (38% in June) . It can be seen that the share of the cryptocurrency derivatives market is increasing month by month.


Figure 2: Trading volume of spot and derivatives in the cryptocurrency market

In a mature traditional financial market, the trading volume of financial derivatives should account for more than 80% of the total trading market, while the market share of cryptocurrency derivatives only accounts for less than half. It shows that the cryptocurrency derivatives market is still in the early stage of development, but the future development space is huge.

Leveraged trading is gradually being replaced

Leveraged trading was introduced earlier in the cryptocurrency market. At that time, as the only derivative tool in the market that could be shorted, it attracted a large number of investors. However, with the introduction of new derivatives such as perpetual contracts, leveraged contracts no longer have advantages.

  1. First of all, leveraged transactions need to pay a higher borrowing fee. In margin trading, the borrower accumulates the currency borrowing fee in real time, and the fee may be higher when the demand currency is less.
  2. The leverage is fixed and cannot be adjusted flexibly. According to the regulations of different cryptocurrency exchanges, the multiples of leveraged trading are generally fixed 3 times, 5 times, or 10 times. Users cannot adjust the leverage multiples at any time, and they are not flexible enough compared to futures contracts.
  3. Leveraged trading relies on the supply and demand side in the spot market. When the supply is insufficient, users cannot conduct leveraged trading with currency borrowing.

In short, the effect of capital amplification provided by leveraged exchanges is currently achieved by many derivative products, such as perpetual contracts. In addition, various limitations and shortcomings in leveraged trading have also been resolved by the design of perpetual contracts. Therefore, with the emergence of more innovative derivatives, leveraged trading is no longer the first choice of mainstream derivatives for users. Perpetual contracts are developing rapidly

From the perspective of derivative transactions, futures contracts are still the mainstream derivatives of cryptocurrency exchanges. The main reasons are as follows.

  1. First, the futures leverage is as high as 100 times. The cryptocurrency exchange has almost become a casino for speculators, and the wealth effect brought by a hundred times leverage is extremely temptation for speculators;
  2. Futures contract trading is easy to understand and simple to operate. Especially for the unique perpetual contracts in the cryptocurrency market, positions can be opened only by the user’s judgment of the direction and the selection of the leverage ratio. For ordinary users, the threshold is low and does not require too much learning cost;
  3. Compared with other derivatives, futures contracts have the highest liquidity. The more participants provide the better liquidity, the less transaction wear and tear when users are trading.
  4. The exchange continues to introduce perpetual contracts based on altcoins. In addition to mainstream currencies such as BTC and ETH, cryptocurrencies with lower market capitalization such as XRP, EOS, and LTC can also become targets for users to open futures contracts. Exchanges can gradually launch contracts for small currencies based on market enthusiasm, provide users with short-selling tools, and attract more users. Therefore, futures contracts have almost become a must-have product for cryptocurrency exchanges, and user participation is extremely high.

1599128930838470Figure 3: Trading volume of perpetual contracts and delivery contracts in the cryptocurrency market

According to the chart provided by Coin Metrics, perpetual contracts account for the bulk of the total contract transaction volume due to their unique characteristics. According to data from TokenInsight, the transaction volume of perpetual contracts in the second quarter of 2020 accounted for 75.2% of the total contract transaction volume, compared with only 39.1% in the first quarter of 2020. The increase in this data indicates that the focus of contract traders is shifting from delivery contracts to perpetual contracts, which have become the most important contract product of cryptocurrency exchanges.

Option contract is in its infancy

For option contracts, the cryptocurrency market is still in its infancy, and there are only a handful of exchanges that can provide option contract transactions. According to the data provided by the Skew website, only Deribit, LedgerX, Bakkt, OKEx, and CME exchange options trading volume data are currently included, and the total trading volume is very small compared to the futures contract trading volume. The above exchanges are all T-quoted standard options, so the demand for liquidity is extremely high.

The prosperity and development of an option market requires a large number of market makers with pricing capabilities to provide it with quotation services and increase liquidity. However, the current scale of the entire cryptocurrency market is still insufficient to support the ecological liquidity of the entire option derivatives.

1599128930878331Figure 4: Trading volume of option contracts in the cryptocurrency market

In order to solve the problem of insufficient liquidity of option contracts in the cryptocurrency market, a simple version of a new type of option was born. The advantage of this option contract is that the user’s counterparty is an exchange, so there is no need to worry about poor liquidity, and it is simpler and easier to understand than traditional option operations. But for professional institutions and quantitative hedging traders, such options have a short expiration date and are not suitable for long-term hedging tools. In addition, the intrinsic value of such option contracts after being packaged by the exchange is not transparent, especially for professional investors and large institutions that are extremely sensitive to the price of derivatives.

In summary, option contracts are at the exploratory stage in the cryptocurrency market, limited by market makers’ liquidity due to low trading volume, and innovative options products still have many problems that require time and the market to verify and improve.

Leveraged tokens continue to innovate but limited trading venues

As an innovative cryptocurrency derivative, leveraged tokens have not been launched for a long time. They are similar to ETFs in the traditional financial market, and their tracking targets are not limited to a single asset. As leveraged tokens require a cumbersome daily position adjustment mechanism, there are currently very few exchanges that can provide leveraged tokens.

The launch of leveraged tokens originated from FTX, an exchange that focuses on the innovation of cryptocurrency derivatives. In addition to tracking Crypto currency assets, FTX also provides tokens that track the performance of the sector, cryptocurrency volatility tokens, etc., and even launched forecasts The token of the presidential candidate in the 2020 U.S. election.

It can be seen that such products increase speculation and gambling. Different assets or objects tracked by leveraged tokens can meet the trading needs of more user groups. The diversification and innovation of leveraged tokens can bring more hot spots to the market, but the current development time of leveraged tokens is relatively short, and there are fewer exchanges that provide leveraged tokens, which also results in limited users.

Regulatory policy

At the end of 2017, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) launched bitcoin futures contracts; in the same period, LedgerX launched the first physical settlement bitcoin futures contract in the United States. Bakkt also launched Bitcoin futures and options contracts in 2019. This product is the first Bitcoin option derivative approved by the US Commodity Futures Trading Commission (CFTC).

At present, in the cryptocurrency market, only the above four domestic exchanges in the United States have been approved by the regulatory authorities and operate derivatives trading in compliance. In addition, there are very few derivatives exchanges that are compliant and regulated globally. Exchanges with the highest trading volume of cryptocurrency derivatives such as BitMEX and Deribit are not actually compliant exchanges.

Judging from the current policies of various countries on cryptocurrency, the supervision of cryptocurrency is still in a state of vagueness. Most countries still maintain a wait-and-see attitude, and there is no complete legal policy to standardize it. Due to the natural cross-regional characteristics of blockchain technology, the exchange lacks a unified and standardized management system for cryptocurrency derivatives, and the laws of various countries are not the same, and the cost of formulating unified and standardized regulatory policies is extremely high.

Derivatives, as a financial instrument of cryptocurrency spot, inherently have higher risks, which ordinary investors cannot bear and control. Therefore, the legalization of derivatives exchanges will be the future direction of the entire blockchain industry. The lack of regulatory policies will prevent the interests of investors from being protected, and the malicious behavior of some small exchanges will directly lead to the loss of user funds. Although it is extremely difficult to comply with derivatives exchanges, it will improve the security of user assets, give users reasonable legal protection, and promote the rapid development of the derivatives industry in a more formal direction.


As the trading volume of cryptocurrency derivatives increases year by year, users have higher and higher expectations for derivatives launched by exchanges. However, it is undeniable that the cryptocurrency industry is still in an early stage, and derivatives also have many The drawbacks need to be resolved urgently.

Trading system issues

Due to the high volatility of cryptocurrency assets, it often triggers violent fluctuations in multiple derivatives markets such as leveraged trading and contracts. The processing capacity of the exchange’s trading system is particularly critical. If users cannot perform operations such as closing or adding positions in a timely manner, huge capital losses may result. When severe market conditions occur, it is common for exchanges to go down. Due to the lack of technical processing capabilities of the system, it is unable to provide users with timely operation requirements, resulting in unreasonable losses in user assets.

At present, mainstream derivatives exchanges such as BitMEX, OKEx, Binance, etc. have experienced system downtime and stalls. If such problems continue to occur, users’ confidence in the exchange will be eroded and the derivatives trading market will be badly developed. . The continuous expansion of the cryptocurrency market will bring more user traffic, and the exchange’s system processing capacity and stability will be the first problem to be solved at present.

Evil behavior

At present, the exchanges in the cryptocurrency market are mixed, with small exchanges emerging in endlessly. They use patterns or petty profits to attract new users for derivatives trading, and then use manual operations such as unplugging network cables and “pinning” to maliciously liquidate user funds, or even run away without repaying user assets. Small exchanges have limited profit margins and therefore have motives for evil. And all of this is because there are no clear regulatory measures in the industry, and user funds cannot be transparently flown after being held by exchanges, causing loss of profits.

Low investment threshold

Traditional financial securities firms require investors to have a certain amount of capital and investment experience for the establishment of derivatives functions, and most cryptocurrency exchanges do not even require users to perform KYC identity authentication to conduct derivatives transactions. Newly-entered users are not yet familiar with ordinary spot transactions, and conducting complex derivatives operations is more like a gamble to toss a coin to guess the positives and negatives.

Cryptocurrency exchanges continue to innovate and charge large amounts of fees from users, but they rarely consider setting investment thresholds for users to protect the interests of novice users. This will gradually reduce the exchange to a casino, which is not conducive to the future development of derivatives.

Derivatives risks continue to increase

The role of derivatives should be used as investors to hedge and reduce risk products, and the current derivatives provided by most exchanges are extremely risky, especially the perpetual contract leverage of individual exchanges can be as high as 125 times. Compared with traditional securities assets, cryptocurrency assets inherently have high volatility. Coupled with the amplification effect of a hundred times leverage, user funds are on the verge of exploding in minutes.

With the continuous upgrading and improvement of the exchange’s transaction processing system, the leverage ratio is also continuously increasing. Although derivatives can hedge risks, the derivatives provided by exchanges are more like a gambling tool. Most users ignore the huge risks brought by derivatives in order to gain high returns.

to sum up

From the perspective of the entire development process of the cryptocurrency market, it has experienced spot trading, leveraged trading, futures contracts, and options contracts and leveraged tokens launched in the past year. The entire cryptocurrency industry is in a very early stage. Although derivative products have been gradually improved through the continuous polishing of exchanges, they still have many uncontrollable factors.

At present, almost all derivatives in the cryptocurrency market are traded on the market. As the only channel connecting users and derivatives, exchanges need to solve and overcome many technical difficulties and user fund security issues, while constantly providing users with rich and valuable hedging tools. Become a trusted, safe and stable platform for users.

The continuous evolution and innovation of derivatives will be the trend of the entire industry. The implementation of regulatory policies in the future will help derivatives to be more standardized and risk controllable, bringing lasting benefits to the overall development of the cryptocurrency market.

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