Bitcoin Speculators Gain Upper Hand as Derivative Trading Surges

(Bloomberg) -- As Bitcoin becomes boring for many in the get-rich-quick crowd with volatility ebbing, trading in derivatives of the largest cryptocurrency is exploding.

At $5 billion to $10 billion a day, the amount of derivatives traded globally exceeds Bitcoin spot volume by 10 to 18 times, according to estimates from data trackers Skew and BitcoinTradeVolume.com. The volumes were about equal at the start of the year, through definitive figures for both are hard to come by from exchanges.

Leading the charge are Asian-based exchanges such as BitMex and Binance that offer futures contracts for Bitcoin and smaller coins that can be leveraged more than 100 times and often perpetually. That’s especially attractive to traders still stung by Bitcoin’s almost 60% decline since late 2017 and hampered by the often thin liquidity that is a consequence of the buy-and-hold Bitcoin “whales” who controled more than a third of the decade-old digital asset.

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

And the number of players is rising as more exchanges seek to get customers to trade more. On Oct. 18, Boston-based Circle Internet Financial Ltd. spun off the Poloniex exchange it bought 18 months earlier as an Asia-based independent company partly so it would be free to offer derivatives.

“To offer this in the U.S. is very cumbersome, it’s very, very heavily regulated, it’s also limited to Bitcoin,” Circle Chief Executive Officer Jeremy Allaire said. “The most popular products that people trade, you can’t even offer them in the U.S.”

On the OKex exchange, twice as many people have been trading derivatives than actual coins this year, according to Andy Cheung, the exchange’s head of operations in Hong Kong.

Binance, the world’s largest crypto spot exchange, launched its futures about a month ago -- and has already registered more than 34,000 customers for derivatives trading and is handling about $500 million in futures a day. On Oct. 18, Binance, which is run from Hong Kong, began offering leverage of as much as 125 times the value of the contracts.

“When trading with leverage, traders don’t have to tie up as much capital as you would trading spot,” said Zhao Changpeng, CEO of Binance. “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 used for things like hedging commercial transactions. Those aren’t yet common in crypto.

“The main use case around this product so far has been around speculation,” said Emmanuel Goh, chief executive of Skew and a former derivatives trader at JPMorgan Chase & Co.

Traders have been looking for new ways to profit as Bitcoin’s volatility has fallen to less than 2% a day lately, according to exchange BitMex. Also driving growth, Binance, for instance, now allows traders -- many of them from Asia -- to buy futures tied to Tether, a so-called stablecoin that people in China can purchase with cash to avoid government capital controls.

Less turbo-charged products haven’t been greeted with as much enthusiasm. Cboe Global Markets Inc. stopped offering Bitcoin futures earlier this year after becoming the first U.S. regulated exchange to do so. Demand has also been tepid so far for the physically delivered contracts offered recently by Bakkt, a consortium led by Intercontinental Exchange Inc.

Crypto futures kicked into high gear in 2018, when BitMex, which is being investigated by the U.S. Commodity Futures Trading Commission, pioneered perpetual Bitcoin futures, which were easier for individual investors to understand than other derivatives, Goh said. The debut of up to 100 times leverage added fuel to the fire.

“BitMex is probably at the center of the whole ecosystem right now,” Shekhar said. He figures that BitMex, which holds the largest market share of crypto derivatives trading in the world, is making at least $700,000 in fees from derivatives trading a day.

But investors need to understand the risk as well as the potential rewards, Goh said.

“Derivatives contracts are a zero sum game,” Goh said. “The money someone makes is the loss of someone else.”

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Brendan Walsh

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