Cryptocurrencies can serve many purposes, as we all know. Some people believe in these assets as functional properties that can help with savings, asset transfers, and more. However, others also see cryptocurrencies as prominent and promising investment vehicles.
For people in the latter, there is little to no doubt that 2020 was a good year. Led by Bitcoin, the crypto market saw significant gains on all fronts, providing that the rally that started in 2019 is very much alive.
Derivatives and the Crypto Space
Of course, as we all know, there is a significant difference between investors. While most retail crypto investors simply buy digital assets and hold until price changes occur in their favor, sophisticated investors tend to look for derivatives instead.
Crypto derivatives are interesting applications of digital asset technology. They bring the derivatives space's benefits to the digital asset industry, allowing holders to invest in cryptocurrencies just as they would with stocks, bonds, and other financial instruments. Today, there is still a lot of uncertainty and a general lack of regulation in the crypto derivatives space. However, it is growing significantly.
Crypto derivatives are favored because they allow investors to access highly liquid and efficient means to invest. They also help mitigate some of the volatility and risks associated with cryptocurrencies.
Derivatives Made History in 2020
In 2020, the crypto derivatives scene saw perhaps its most critical year. There was significant growth in the Bitcoin and Ether derivatives space, with options and futures products on exchanges like OKEx, the Chicago Mercantile Exchange, and Binance growing significantly.
One of the most important metrics when considering the performance of derivatives is open interest. This metric considers the number of outstanding derivatives contracts that are yet to be settled. It essentially shows whether the money flowing into the derivatives is growing or dropping.
Data from Skew Analytics showed that the open interest on Bitcoin options reached $6.8 billion on December 31 – an all-time high. The number was over three times the recorded open interest just 100 days before that. As expected, this shows that the derivatives market is on a tremendous growth pattern.
It appears evident that the bull run of 2020 led to an influx of new investors in the crypto market. While many of these came in the form of retail investors who merely bought Bitcoin, others looked to invest in the asset through derivatives instead. Those in the latter category are essentially using Bitcoin to preserve their wealth and hedge against inflation.
With the coronavirus pandemic hitting traditional markets and industries, crypto derivatives provide an opportunity for investors to keep up their activities in a healthy market. The crypto market remains strong today, continuing with a surge that began months ago. Now, factors show that this could spill to the derivatives space as well.
The Growth of Institutional Bitcoin Investors
One of the primary reasons for the 2020 bull run has been a surge in institutional investment. However, many of these investors appear ready to make plays for crypto derivatives too.
As explained earlier, derivatives are complex financial instruments that average retail investors don't necessarily understand. Institutions, on the other hand, have been enjoying access to them. In 2020, several firms purchased Bitcoin, using the leading cryptocurrency to back their asset reserves and as a treasury investment.
Several investment firms have noticed this, and they have developed products and resources to attract these investors. By providing tools like options, futures, and spot trading facilities, these investment firms are essentially providing an opportunity for institutional investors to play in the crypto market like they would in the traditional financial space.
Speaking to news sources, a spokesperson for the Chicago Mercantile Exchange (CME) confirmed that the company had seen a growth in the number of large open interest holders (LOIH) on its futures contracts. A LOIH investor holds at least 25 Bitcoin futures contracts, each worth 5 BTC. So, becoming a LOIH means having about 125 BTC – over $4 million by today's prices.
The spokesperson explained that the CME had seen about 103 LOIH investors in November 2020 – a 130 percent jump over November 2019. With crypto derivatives in such high demand, it appears that cryptocurrencies are now in much higher demand.
Since everyone expects institutional investors to flood into the crypto market in 2021, derivatives could be in for a surge.
DeFi and ETH 2.0 to Pump Ether
As for the Ethereum futures, two of the most significant growth drivers will be the growth of decentralized finance (DeFi) and the current Ethereum 2.0 rebrand.
Ether derivatives already grew significantly, and the CME announced last month that it would launch Ether futures in February. This, in itself, shows that Ether is also maturing as an investment asset.
While much of Ether's performance hinges on Bitcoin, the asset is also coming into its own. The Ethereum blockchain is the primary platform for most DeFi tokens, with DeFi Prime noting that the blockchain holds more protocols than others combined.
Many DeFi protocols have launched bids to break out from Ethereum, but it hardly matters. The blockchain is expected to continue its dominant run, and with assets locked in DeFi at all-time high levels, Ether should get a nice DeFi-fueled boost. Eventually, investors will flock to Ether as well, and derivatives based on the asset will grow.
Ether is also expected to get a boost from the upcoming Ethereum 2.0 upgrade. Amongst other things, the upgrade should bring easier mining and greater scalability to the Ethereum blockchain. With the platform much easier to use, Ether will benefit from that improved functionality over time.