Understanding crypto derivatives and structured products
As crypto adoption has grown, so has the crypto derivatives market.
Crypto derivatives trading volumes surpassed spot volumes for the first time in June this year, as more retail and institutional investors sought the use of options, futures and perpetual swaps to hedge against tail risks.
Damien Loh, CEO of Matrix Asset Management, noted that more options are being traded on Bit.com, Matrixport’s derivatives exchange.
One reason for this is options allow traders to take advantage of price movements more readily, particularly during a bullish market, Loh shared at a recent Bloomberg webinar titled 'Understanding Crypto Derivatives and Structured Products'.
Central to this rising phenomenon are family offices, wealth managers and even traditional hedge funds, Loh added. Many of these entities, he shared, have entered the space via spot futures and cash and carry trades, to name two contract types.
Dual Currencies is a short-term investment product designed for varying risk appetites that lets users earn a range of returns on their investments in either BTC or USDC, depending on the settlement price when the tenor ends.
Range Sniper is an options-based product that automatically calculates spot, options and settlement prices, then rewards users with maximum returns on their investments if the price of BTC settles within a pre-determined range.
“Structured products wrap up options in a format that are a lot more understandable to derivative novices,” said Loh.
“Matrixport is one of the pioneers of structured products. Given the good uptake of that, we will continue to innovate and grow in those areas of the crypto derivatives space.”
Advantages of crypto derivatives versus spot
Another benefit of derivatives is that it allows for trades that cannot be performed with spot alone, including cash and carry, arbitrage and convergence trading.
They also help to jumpstart liquidity without the need for owning a large inventory of coins, which is key for market making in spot markets.
“With derivatives, just as in traditional finance, you could start market making around specific coins and tokens just with the derivative product itself,” said Loh.
“It also allows you to express a view of the market that is either time- or price-based by putting some combinations of options.”
For instance, suppose there is an individual who believes that bitcoin’s current price level is too low and holds a bullish long-term outlook. They can then sell put options on BTC and pick up the asset again at a lower price level, rather than only being able to put limit orders as in spot markets.
“Derivatives give a different dimension to a market, rather than whether it is going up or down. You can express if a market is going to be volatile or not volatile,” said Loh.