Mom and pop bitcoin enthusiasts in America now have access to a brand-new derivatives playground that cryptocurrency specialists think may revitalise a dormant sector.
Coinbase (NASDAQ:COIN) Global, a cryptocurrency exchange, serves as its new platform. On August 16, it became the first crypto-focused company to receive approval to provide bitcoin futures to U.S. retail consumers.
It’s still early. However, the first regulated and listed cryptocurrency company to provide futures trading to American public investors has the potential to resurrect the $2 trillion bitcoin derivatives market, which is now on the decline.
According to Lucas Kiely, chief investment officer of digital investment platform Yield App, “Coinbase’s approval to offer U.S. futures has the potential to rekindle hope and momentum in the market.”
In a market where bitcoin has been stagnating for months due to unfavourable central bank policies around the world and issues with cryptocurrency exchanges like FTX and Binance, momentum and hope are in short supply.
Coinbase’s announcement also comes at a time when trading volumes in derivatives have dramatically decreased as a result of persistent regulatory barriers, low volatility, and economic insecurity that has discouraged investors from placing large wagers.
On authorised exchanges like Bitstamp and Coinbase, retail traders in the US can directly trade bitcoin. On the CME, they can trade options, but only through a broker. Alternately, they could invest in exchange-traded funds (ETFs) for bitcoin offered by fund managers like ProShares and VanEck.
That is why there is excitement around Coinbase’s new product. A surge of retail traders, known for their hysterical meme-stock trading sparked on social media platforms like Reddit, might alter the cryptocurrency landscape.
According to Todd Groth, head of index research at CoinDesk Indices, it is still too early to determine the launch’s impact. It’s still unclear how Coinbase will arrange these goods, he added.
Reduce derivatives.
Since these products debuted in 2014, derivatives like options and futures have dominated the trading of cryptocurrencies as investors seized the chance to make wagers on bitcoin’s price movements with small initial investments.
The number of large open interest holders (those owning more than 25 contracts) in CME bitcoin futures has increased by 5% since the second quarter, according to the exchange’s data, indicating that institutional investors have a strong preference for them.
The predominance of options trading, where investors place extremely leveraged bets that potentially pay out for both gains and losses, is sometimes mentioned as the cause of cryptocurrencies’ infamous volatility.
However, futures trading volumes fell by about 13% in July to $1.85 trillion, the lowest monthly volume since December 2022 and the second-lowest volumes since 2021, according to research firm CCData.
In cryptocurrency markets, derivatives are a huge industry. According to CCData, derivatives accounted for 78.2% of the entire cryptocurrency trading volume on centralised exchanges in July.
Despite a decline in overall volumes in the second quarter of 2023, derivatives volume was six times more than spot volume, according to Kaiko Research.
According to CCData, spot cryptocurrency trading volumes decreased 10.5% to $515 billion during the same time frame.
Dessislava Aubert, an analyst at Kaiko, stated that offshore exchanges, particularly Binance, now dominate the derivative market.
But this year, we have noticed a reduction in its power. In essence, this indicates that there is room for expansion in the derivatives trading industry. In particular, Coinbase may be able to draw in institutional clients by using its solid reputation.
