Bitcoin Derivatives Trades Soaring in ‘Biggest Casino Ever’

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Bitcoin Derivatives Trades Soaring in ‘Biggest Casino Ever’

Bitcoin volatility is decreasing, which seems to be making typical spot trading in the world’s biggest cryptocurrency a less appealing pastime. Speculators eager for big profits are resorting to Bitcoin derivatives, which are leveraged contracts that may convert even modest price changes in the underlying asset into big profits, but also big losses. According to a recent Bloomberg piece, global trade of such instruments has now surpassed spot trading in Bitcoin.

Leading the Bitcoin derivatives frenzy is cryptocurrency exchange BitMex with a 24-hour trading volume of $1.82 billion in Bitcoinfutures contracts. Next up is Huobi with a 24-hour trading volume of $1.00 billion, followed by bitFlyer at $0.67 billion, Binance at $0.56 billion, and CoinFlex at $0.48 billion. Global daily trading activity in Bitcoin derivatives is currently in the region of $5 billion to $10 billion, 10 to 18 times larger than Bitcoin spot volume.

“That’s where the money is in crypto,” said Sid Shekhar, creator of London-based tracker TokenAnalyst. “This is the largest casino ever.”

Key Takeaways

  • Bitcoin derivatives are surpassing Bitcoin spot trading.
  • The daily global trade volume is between $5 billion and $10 billion.
  • Bitcoin’s daily volatility has lately dropped to less than 2%.
  • Bitcoin futures provide traders the ability to employ leverage.

What It Means for Investors

Trading in Bitcoin futures overtook that of spot trading until lately as daily transaction volume in both was approximately equal in the beginning of the year, however it should be emphasized that exact statistics from crypto exchanges is not simple to come by. At least one factor for the fall in spot transactions compared to trading in derivatives is the emergence of theBitcoin whales, market players who control around a third of the digital currency. These whales may have disproportionate influence on price changes and lead to illiquidity.

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But a greater reason for the transition to futures trading is the reduced volatility of Bitcoin itself. Price movements have reduced to below 2% a day lately, according to exchange BitMex, perBloomberg. While it could serve to strengthen Bitcoin’s prospects as astable store of value and encourage people who consider the digital currency as a kind of money, it’s a sad development for speculators betting on significant price fluctuations. Although the digital currency that some have likened to gold dropped roughly 20% of its value in a space of four days at the end of September.

But the traders searching for windfall rewards that come from taking greater risk are relocating to derivatives markets, making advantage ofleverage to maximize the possible earnings in the absence of unpredictable price fluctuations of the underlying. Both BitMex and Binance provide Bitcoin futures contracts that may be leveraged more than 100 times and typically with no expiration date (i.e. perpetual futures contracts) (i.e. perpetual futures contracts).Binance only debuted its futures in September and now has 34,000 consumers enrolled for derivatives trading and processes roughly $500 million in futures per day.

“When trading using leverage, traders don’t have to tie up as much cash as you would trading spot,” Binance CEO Zhao Changpeng toldBloomberg. “This makes trading futures cheaper. This is the reason why futures trading in conventional markets is greater than spot trading.”

But in conventional markets, derivatives are commonly used to hedge commercial transactions, which as of yet, are not all that prevalent in bitcoin markets. The more probable use of derivatives in these markets is for speculation, and that implies there’s a lot more speculating going on. More than$23 billion had been traded in crypto-derivative products over the first nine months of the year, including crypto options, futures and other exotic securities.

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Looking Ahead

But for others, speculating is equal to gambling. And although leverage, utilizing borrowed capital to boost one’s exposure in a financial asset, may compound profits, it can also amplify losses. In a big enough market, sustained losses may have spillover effects into other financial markets and create the risk for a financial crisis, which is why government authorities throughout the world aretaking a harsh position on crypto derivatives. “The most popular things that people trade, you can’t even sell them in the U.S.,” Circle CEO Jeremy Allaire toldBloomberg.

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