Bitcoin Derivatives Trades Soaring in ‘Biggest Casino Ever’

Bitcoin volatility is waning, and that’s apparently making traditional spot trading in the world’s largest cryptocurrency an increasingly boring activity. Speculators looking for jackpot trades are now turning to Bitcoin derivatives, leveraged products that can transform even minor price swings of the underlying asset into major gains, but also substantial losses. Global trading of such products is now outpacing that of spot trading in Bitcoin, according to a recent story in Bloomberg as outlined below. 

Leading the Bitcoin derivatives stampede is cryptocurrency exchange BitMex at a 24-hour trading volume of $1.82 billion in Bitcoin futures contracts. Next up is Huobi at 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 volume in Bitcoin derivatives is now in the range of $5 billion to $10 billion, 10 to 18 times higher than Bitcoin spot volume.

“That’s where the money is to be made in crypto,” Sid Shekhar, cofounder of London-based tracker TokenAnalyst, told Bloomberg. “It’s the biggest casino ever.”

Key Takeaways

  • Bitcoin derivative trading is outpacing Bitcoin spot trading.
  • Global daily trade volume between $5 billion and $10 billion.
  • Bitcoin spot price volatility has fallen to less than 2% a day recently.
  • Bitcoin derivatives allowing traders to use leverage.

What It Means for Investors

Trading in Bitcoin derivatives surpassed that of spot trading only recently as daily trade volume in both was about equal at the beginning of the year, although it should be noted that precise data from crypto exchanges is not easy to come by. At least one reason for the decline in spot trades relative to trading in derivatives is the presence of the Bitcoin whales, market participants who control about a third of the digital coins. These whales can have disproportionate impacts on price movements and contribute to illiquidity. 

But a bigger reason for the shift to derivatives trading is the declining volatility of Bitcoin itself. Price swings have fallen to below 2% a day recently, according to exchange BitMex, per Bloomberg. While that might help to improve Bitcoin’s candidacy as a stable store of value and favor those who see the digital currency as a form of money, it’s a disappointing development for traders speculating on major price swings. Although the digital asset that some have compared to gold lost nearly 20% of its value in a period of four days near the end of September. 

But the traders looking for windfall profits that come from taking more risk are migrating to derivatives markets, making use of leverage to increase the potential gains in the absence of volatile price movements of the underlying. Both BitMex and Binance offer Bitcoin futures contracts that can be leveraged more than 100 times and often with no expiry date (i.e. perpetual futures contracts). Binance just launched its futures in September and already has 34,000 customers registered for derivatives trading and handles about $500 million in futures every day. 

“When trading with leverage, traders don’t have to tie up as much capital as you would trading spot,” Binance CEO Zhao Changpeng told Bloomberg. “This makes trading futures cheaper. This is the reason why futures trading in traditional markets is higher than spot trading.”

But in traditional markets, derivatives are often used to hedge commercial transactions, which as of yet, are not all that common in cryptocurrency markets. The more likely use of derivatives in these markets is for speculation, and that means there’s a lot of speculating going on. More than $23 billion have been traded in crypto-derivative products through the first nine months of the year, including crypto options, futures and other exotic instruments.

Looking Ahead

But for some, speculation is tantamount to gambling. And while leverage, using borrowed cash to increase one’s exposure in a financial asset, can amplify gains, it can also amplify losses. In a large enough market, extended losses can have spillover effects into other financial markets and create the potential for a financial meltdown, which is why government regulators across the globe are taking a hard stance on crypto derivatives.  “The most popular products that people trade, you can’t even offer them in the U.S.,” Circle CEO Jeremy Allaire told Bloomberg.

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