U.S. retail traders eye a fresh piece of the crypto derivatives pie
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[August 22, 2023] By
Lisa Pauline Mattackal and Medha Singh
(Reuters) - America's mom and pop bitcoin buffs have a shiny new
derivatives playground that cryptocurrency analysts hope will fire up a
moribund market.
Their new platform is cryptocurrency exchange Coinbase Global, which on
Aug. 16 became the first crypto-focused firm to win approval to offer
cryptocurrency futures to U.S. retail customers.
It's early days. But crypto markets are excited by the possibility that
the first regulated and listed crypto firm to offer futures trading to
U.S. retail investors might revive a shrinking $2 trillion
cryptocurrency derivatives market.
"Coinbase’s approval to offer U.S. futures has the potential to rekindle
hope and momentum in the market," said Lucas Kiely, chief investment
officer of digital investment platform Yield App.
Hope and momentum are in short supply in a market that has seen bitcoin
languish for months as hawkish global central banks and troubles at
crypto exchanges such as FTX and Binance sapped interest in volatile
crypto assets.
Coinbase's announcement also comes at a time when derivatives' trading
volumes have shrunk significantly owing to economic uncertainty,
continued regulatory hurdles and low volatility that left investors
disinclined to make big bets.
Retail traders in the United States can trade bitcoin directly on
licensed exchanges such as Bitstamp and Coinbase. They can trade options
on the CME, but only through a broker. Or, they can invest in bitcoin
exchange-traded funds (ETFs) issued by fund managers such as ProShares
and VanEck.
That is why Coinbase's new offering is creating a buzz. A rush of retail
traders, famed for their manic meme-stock trading roused on social media
sites such as Reddit, could change things in the crypto world.
Todd Groth, head of index research at CoinDesk Indices, says it is too
early to gauge the impact of the launch. "It remains to be seen how
Coinbase structures these products," he said.
DROP IN DERIVATIVES
Derivatives such as options and futures have dominated cryptocurrency
trading since such products appeared around 2014, as investors snapped
up the opportunity to place bets on bitcoin's price moves with minimal
investment.
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Representations of cryptocurrencies are
seen in this illustration, August 10, 2022. REUTERS/Dado Ruvic/Illustration/File
Photo
They are also heavily favored by institutional investors, whose
interest has remained fairly steady this year, with the number of
Large Open Interest Holders - those holding more than 25 contracts -
in CME bitcoin futures up 5% since the second quarter, according to
the exchange's data.
The dominance of options trading is often cited as a reason for
cryptocurrency's trademark volatility, with investors taking on
heavily leveraged bets that can reward them for both gains and
losses.
Yet, trading volumes in derivatives decreased by nearly 13% in July
to $1.85 trillion, the lowest monthly volume since December 2022 and
second lowest derivatives trading volumes since 2021, research firm
CCData reported.
Derivatives are big business in crypto markets. Derivatives made up
78.2% of the total cryptocurrency trading volume on centralized
exchanges in July, CCData reported.
In the second quarter of 2023, derivatives volume was six times
larger than spot volume even as overall volumes fell, according to
Kaiko Research.
Spot cryptocurrency trading volumes also fell 10.5% to $515 billion
in the same period, CCData showed.
"For now, the derivative market is dominated by offshore exchanges,
mainly Binance," said Dessislava Aubert, an analyst at Kaiko.
"But we have seen its dominance decline this year. This essentially
means that there is potential for growth in derivatives trading. In
particular, Coinbase could leverage its strong reputation and
attract institutional clients."
(Reporting by Lisa Mattackal, Medha Singh and Sumanta Sen in
Bengaluru; Editing by Vidya Ranganathan and Mark Potter)
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