Crypto Derivatives Are Industry's Next Key Source of Growth, Says Genesis Trading

Crypto's derivatives market is poised for significant growth, driven by challenges in spot market liquidity and a shift towards derivative instruments, Genesis Trading said in its Q2 2023 report.

“With spot market liquidity suffering and spot order book depth chronically flagging, it has become increasingly apparent that a significant portion of the future growth of crypto volumes will be in derivatives,” Genesis said.

Genesis Trading, a subsidiary of Digital Currency Group, primarily focuses on over-the-counter (OTC) trading services for institutional investors and high-net-worth individuals.

In its latest report, the firm highlighted key developments in the crypto derivatives space during Q2 2023, including options exchange Deribit hitting a new year-to-date high for the number of option contracts traded within a 24-hour period.

This achievement coincided with Bitcoin's resurgence past the $30,000 mark, reflecting the close interplay between price movements and derivatives activity.

Genesis also highlighted Coinbase rolling out its institutional-sized fixed-date and perpetual futures in June, as well as pointing to options volumes at the Chicago Mercantile Exchange (CME) experiencing a significant increase of nearly 25% in July, reaching approximately $1 billion.

This surge in options volumes occurred alongside a decline in futures trading volumes, “boding well for a continuation of the trend that options are increasingly seen as the go-to instrument for institutional players,” according to Genesis.

Options market could see 10x growth: Genesis

The report further emphasized the potential transformative impact of a robust crypto derivatives market on global institutional adoption.

Despite the rapid growth of the options market, its volume for the first half of 2023 accounted for only about 10% of the underlying spot volume.

Drawing parallels with traditional finance, where the notional volume of equity options surpassed the notional traded value of underlying equities, Genesis believes the crypto options market could potentially expand tenfold from its current levels.

"As a corollary, the notional volume of equity options in the US exceeded the notional traded value of the underlying equities in 2021 for the first time," the report read. "If following this TradFi trend, the crypto options market has room to grow 10-fold from current levels."

The second quarter of the year also witnessed the entry of established financial entities into the cryptocurrency space, indicating a broader trend toward adoption and legitimacy.

The firm further highlighted the vast potential for increased institutional participation in the crypto space, with around $50 trillion in capital sitting among U.S. pension funds, 401(k) plans, and hedge funds.

According to Genesis, the possibility of these funds gaining exposure to Bitcoin through spot-based ETFs could have positive implications for the crypto market's growth and maturation, as the launch of ETFs has historically acted as a catalyst for price appreciation in the underlying asset.