"Grandmother, what big derivatives you have." “The lack of clarity over the size of the derivatives market points to its opaqueness, with little improved real-time risk transparency since the financial crisis of 2008-09. In a famous investor letter from 2002, Warren Buffett referred to derivatives as “weapons of financial mass destruction”
There are regulated crypto derivative instruments currently trading like CME’s bitcoin futures, options on futures and the recently launched exchange-traded note (ETN) from Van Eck/Deutsche Boerse. However, product creation is only one part of the puzzle. The crypto derivatives community needs to create real-time risk mitigation and management tools for regulators, industry professionals and, ultimately, help all of us all build more resilient derivatives markets ahead of the next financial crisis.
There will be another financial crisis. The question is, will the crypto derivatives market create it, fuel it, or help mitigate the negative fallout? However, in the years since, derivatives have attracted speculation and leveraged trading, which can spell disaster if regulatory guardrails are not clear and enforced. In the 2000s,
In 2021, the industry should step up engagement with legislators and regulators on the topic of derivatives, margin trading, and real-time reporting. It is, when, not if, more crypto derivative products and services will come onto the market. We have seen a notable uptick in interest and inquiries from a variety of stakeholders, including governments and the private sector.
The decentralized finance (DeFi) community as well as leading fintechs are developing a lot of creative solutions around real-time settlement, mitigating counterparty risk (aka atomic swaps) and reduction of margin and/or collateral with perpetual futures and other innovative solutions. However, there is a double-edged sword of accountability when things go wrong. Who is accountable? And where does one go, if maligned, and there are financial losses?
“In 2011, the first crypto derivatives came to market, although they were limited to futures contracts based on the price of bitcoin (BTC). Several years later, exchanges began offering a broader selection of derivatives that investors could use to hedge against expected market movements and profit off of future price volatility, and by 2020 the crypto derivatives trading market had exploded to record highs. As of May 2020, the crypto spot market had a 24-hour trading volume of $200 billion, while the crypto derivatives market had a trading volume of approximately $320 billion — around 60% higher than the spot market.
With an increasing number of institutional investors making efforts to hedge their positions in large-cap cryptos like BTC, many experts believe the trading volume lead that crypto derivatives hold over crypto spot trading might grow even larger yet.”
https://www.gemini.com/cryptopedia/cryptocurrency-derivatives-trading-synthetic-assets
https://www.coindesk.com/policy/2021/01/20/dear-crypto-derivatives-industry-lets-not-repeat-2008/
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