Just a decade ago, speculating on cryptocurrency prices meant figuring out how to buy Bitcoin and add it to your blockchain wallet. Notably, in 2010, there were very few exchanges, low liquidity and almost no infrastructure, meaning that cryptocurrencies are not financial instruments and are new digital technologies.

Larger centralized exchanges give the idea that Bitcoin and other cryptocurrencies have relative value and can speculate on their value relative to fiat money. Since then, a series of crypto derivatives have been born. This has given traders many new ways to raise capital in the nascent ecosystem.

The novelty of cryptocurrencies and unique decentralized characteristics have spurred the emergence of new financial tools and terminology for the ecosystem with an impact that is difficult to predict. It really is a great test of how the money market matures and changes from the old considered ideas of the fiat market.

There are many Bitcoin tools for corporate traders out there that raise important fundamental questions and give us a glimpse of how the crypto market as a whole could end.

Theoretical derivatives

Derivatives are financial instruments that can be used by traders to speculate in different ways on the underlying asset. In the case of Bitcoin – a scarce asset that can only be minted by mining blocks to support the blockchain – the concept of being able to use Bitcoin for the long term without buying or directly mining makes sense.

Not only is the majority of Bitcoin value derived from scarcity due to difficulty in mining, but owning BTC means having control over its associated private key. If derivatives traders are trading Bitcoins they don’t own, they can get exposure without buying physical BTC. In this case, is the underlying value of the blockchain guaranteed for the promise of easier speculation?

However, some of the most mature markets such as the stock market have maintained integrity despite the larger and more diversified derivatives markets. In fact, the growth and maturation of derivatives may even be what helps the cryptocurrency achieve the status and market capitalization it deserves.

What form for derivatives to be admitted?

There are many new crypto derivatives emerging. Some are launched by well-known financial companies in the fiat money market, and some are new with value-added blockchain elements. They come in many shapes and sizes, allowing different strategies to be pursued in the cryptocurrency market. For example, the first derivatives milestone for Bitcoin was futures contracts on the Chicago Board Options Exchange in late 2017.

The XBT instrument as well as other futures services from CME are cash-settled contracts using BTC prices from other sources. This means they are effectively separate from blockchain and Bitcoin. As a result, the BTC supply remains untouched regardless of the demand for XBT futures.

Bakkt is a new exchange venture of Intercontinental Exchange (ICE). The platform launched recently to offer physically settled Bitcoin futures in traditional markets. This means that the first brick on the road to institutional investment in BTC has been laid. Pension funds and venture capital firms have invested in the underlying asset, helping to hedge their positions, and instead of realizing cash gains or losses, their position results only simply affect the Bitcoin balance. As such, they are the first futures contracts to stimulate the supply and demand equation inherent in Bitcoin’s bullish momentum.

Options are a newer class of instruments that have not been implemented by major exchanges like CME, but are planned for the first quarter of 2020 and are currently awaiting regulatory approval. CX recently announced its intent for physically-settled swaps on BTC futures, adding leverage to it.

This will create opportunities for futures buyers to buy or sell at specific strike prices and on margin, expanding the way individuals and institutions manage capital when it comes to cryptocurrencies.

The Future of Decentralized Derivatives

The key for new derivatives and cryptocurrencies is to find a way to tie into the traditional fiat economy. A clear demonstration of this struggle is that it took Bakkt most of 2019 to create the first derivative to link the two worlds. However, because of sufficient infrastructure and custody solutions, as well as transparency on tax liability, institutions have begun to dive into cryptocurrencies in greater numbers.

Soon, new derivatives that allow exchanges to pay in physical BTC will be available to the public, scaling using specialty products such as ETNs.

A mature market and a mysterious future

As liquidity from derivatives increases, economists have estimated the crypto market will become less volatile, making it more attractive to funds looking to capitalize on an all-out growth strategy.

In short, derivatives are meant to control risk and are very likely to encourage speculation. The comfort and rapid growth of these tools in the crypto world are strides in evolution. As such, it can be said that incumbent fiat money ideas have changed the crypto space.

As new derivatives like the upcoming OKEx margin futures for Tether compete with similar instruments in the forex market, how will the emerging small market affect the old market? However, nothing is certain in the crypto world.

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