The cryptocurrency market is just ten years old. In fact, the decade birthday of Bitcoin occurred just this January. As the market has grown, and adoption has increased, so has the complexity of trading venues for this newest asset class.
Trading has increased in dramatic volumes since those early days, and this has led to correlated growth in derivates markets. While these markets are relatively well known in legacy investments, they are still seeking stability in the crypto space. This has resulted in growing pains.
For example, in recent news, BitMEX, one of the larger Bitcoin derivatives trading platforms, was forced to clawback returns from investors. This occurred as the price of Bitcoin rose unexpectedly, resulting in short position stop-losses being activated.
To cover these automatic purchases, the exchange was forced to take profits from other investors. While they have promised to compensate them, the massive auto-deleveraging event reveals the danger in the market.
In response to these types of situations, new exchanges have sought to fill the gap, offering better and safer derivatives trading, as well as cheaper and more robust ways to participate in the cryptocurrency market.
One such platform is FT Exchange (or FTX), a cryptocurrency trading platform. The company has created a system for over the counter (OTC) trading that offers some of the cheapest fees in the industry.
This is accomplished through backing from Alameda Research, which trades as much as $1 billion per day over 30 other crypto exchanges. With this much trading taking place, trades can be executed with substantially lower costs than almost any other exchange.
Though the exchange has just gotten off the ground, this model has driven a large number of traders to their platform to take advantage of these cheaper rates. And with the OTC traders comes increasing derivates volume as well.
The FTX model is just one of the newest in exchange upgrades that bring maturity to the crypto derivatives market. These new industry leaders are seeking to find ways to respond to the need, protect users, and offer better or easier on-boarding.
Dulling the claws
The clawback issues facing exchanges in derivates trading has been dealt with by these new exchange platforms by offering some substantial improvements through increased financial backing and better policies overall.
When market movements cause squeezes like the BitMEX example, the newest models have a three-pronged system for protecting user assets. First, the company will close positions carefully, using rate-limited liquidation orders. Second, the company’s financial backing offers a substantial liquidity safety net to protect client assets. Finally, as with legacy stock exchanges, these newer platforms offer the customary insurance, should losses occur.
With these three protections in place, new exchanges can provide substantial clawback protection for client assets. At the same time, they offer dramatically cheaper trades, which will eventually result in movement away from less robust but more expensive options.
A host of other impacts have occurred in the derivatives market in concert with the BitMEX issue. First, investors saw the massive price change in Bitcoin as a sudden shift to the bull market that defined 2017. Of course, 2018 was aptly called the ‘crypto winter’, as much of the gains of the previous year were wiped away. However, the move back to a bull market signaled a shift for derivatives traders to move out of short positions and into longs.
Second, and notably, the derivatives market course correction also brought increased attention to cryptocurrency derivatives trading. What was previously a lesser known side of Bitcoin suddenly became something of a news story, leading to increased involvement. Obviously the losses that occurred from the BitMEX auto-deleveraging event were substantial, but in the end, the company’s public awareness increased dramatically.
These changes – movement toward long positions and increased public awareness – have also highlighted the need for lower barrier of entry points for exchanges in the crypto space. Seen predominantly as a fringe market, the increased attention has created mainstream needs, with rapid and simple solutions for on-boarding and trading tools.
Filling the gap
While the nascent cryptocurrency and derivates markets continue to grow in adoption, exchanges like FTX are providing the kind of stability that is needed to bring maturity to the industry. The growth in market awareness and increasing attention on Bitcoin and other coins has led to a need for simple, elegant solutions that bring the industry up to speed. As the market continues to mature, new exchanges and trading platforms need to battle against the relatively tarnished reputation that still plague Bitcoin. Rather than simply a black market trading device, Bitcoin is beginning to come to the mainstream, and these new solutions provide a vehicle for accomplishing just that.