Annual Report 2020: Crypto Derivatives Trading Volume Reach New Heights + Phemex Case Study

1. Overview

1.1 The astronomical growth of crypto derivative trading in 2020  

Over the years, cryptocurrencies have evolved from fringe assets to mainstream acceptance. Initially, the growth of cryptocurrencies was driven by trading in the spot market. 

In 2017, the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) became the first traditional exchanges to offer the trading of crypto derivatives. Since CBOE and the CME are well regulated and reputable derivative exchanges, trading BTC futures garnered mainstream interest from large corporations, banks, and high net-worth individuals (HNIs) who were previously sceptical of cryptocurrencies. However, trading crypto futures on such exchanges can only occur on regular business hours. 

In 2020, evolution of Decentralised Finance (DeFi) has led to development and innovation in the crypto ecosystem. Several crypto exchanges have developed various derivative products for the market. More so, the market is very receptive to these derivative products, which are perhaps the main reasons for crypto derivatives’ astronomical rise. The establishment of several centralised and decentralised crypto derivative exchanges has led to 24/7 derivative trading and a daily turnover surge.

‘We have observed big increases in the user space when it comes to the crypto derivatives market over the past year. I believe that the crypto derivatives market will continue to grow in the upcoming years.’ Jack Tao (CEO, Phemex)

1.2 Trading volume of crypto derivatives has now crossed $1.3 Trillion

As reported by Theblockcrypto, the average daily trading volume for crypto derivatives was over $1.3 trillion in December 2020, representing 55% of the total cryptocurrency market. Trading in crypto derivatives has overtaken the spot market, which only accounts for 45% of all crypto trading. The charts below display the trading volume & aggregated open interest of Bitcoin futures in 2020.  

*Please note that the values in the above charts are approximations and must be used for directional purpose only. 

1.3 Why Crypto Derivatives Are Gaining Popularity Among Traders?

Firstly, 2020 was a tumultuous year for the fiat financial system. The unprecedented expansionary fiscal and monetary policies threatened the entire financial ecosystem with massive inflation. Consequently, both individual and institutional investors had to seek viable alternatives for a store of value outside the fiat financial system. They turned to cryptocurrencies, which led to a surge in trading volumes. Specifically, crypto derivatives offered a chance to speculate and hedge against the uncertainties presented by COVID-19.

Secondly, the increased regulation of the crypto sector has increased the appetite for crypto derivatives. Regulation of the crypto ecosystem is seen as a nod of acceptance by governments and financial authorities. This has led to public corporations, hedge funds, and high net-worth individuals entering the market in search of superior returns. 2020 saw the most regulation enacted around cryptocurrencies, which coincided with the highest number of corporate traders in crypto derivatives. Such traders seeking superior returns often prefer crypto derivatives since they allow leveraged trading, which significantly magnifies profits.

Also, crypto derivatives play an important role in the price discovery of their underlying cryptocurrencies. For example, the derivative market’s liquidity has manifested into price discovery for BTC and ETH in the past. Since traders can go long or short as they please, price discovery becomes more efficient, unlike the spot markets, where investors and traders can only hold cryptos hoping for prices to go up. Crypto derivatives ensure that price discovery lies with supply and demand. This helps to reduce the frequent volatilities inherent in cryptos, hence, ensuring smoother price adjustments. 

2. Outlook for Crypto Derivatives in 2021

It is worth noting that the introduction of derivatives trading often signals the maturity and mainstream acceptance of any asset. This is because the derivatives are designed for the more sophisticated traders and investors. 

Below are some of the main reasons why crypto derivatives will continue to rise in 2021 and beyond. 

2.1 Crypto Derivatives bring liquidity into the market

Trading in crypto derivatives means that you do not need to own the underlying coins. Thus, you can easily enter and exit a trade. It is common knowledge that there are finite cryptocurrencies in the market. For example, there is a little more than 17 million BTC in circulation as of this publication. This would mean that BTC is rather illiquid in the spot market, which means it is susceptible to price volatility. But with derivatives, market makers can easily manage their exposure by providing liquidity and hedging their risks in the spot market. This, in turn, frees up liquidity for the underlying crypto.

2.2 Derivatives are used to hedge cryptocurrency price risk

We have witnessed the mainstream acceptance of cryptocurrencies. This means that merchants and corporations can use cryptos as means of payment. However, since cryptos are inherently volatile, derivatives give merchants the option to hedge against such risks. For example, say that you anticipate that BTC will become volatile. In this case, you can use inverse BTC/USD futures to lock in a specific value. This eliminates the risk of holding cryptos, and also helps onboard firms which deem cryptos to be too risky.

2.3 Derivatives will play an important role in the price discovery of cryptos

For any asset, price is often determined by its supply and demand. In the past, price discovery in the crypto market was inefficient. This is because trading in the spot market dominated crypto trading. In the spot market, traders and investors participate with only one goal: the cryptos they hold will appreciate. With derivatives, traders can go long or short. This, coupled with the increased liquidity, ensures a more efficient price discovery process. Note that efficiency in price discovery helps legitimise cryptocurrencies as tradable assets.

3. Case Study: How Phemex Is Accelerating the Adoption of Crypto Derivative Trading

3.1 The evolution of the Phemex crypto exchange   

Phemex is a Singapore-based centralised crypto exchange that offers both spot and derivatives trading. It began operations in November 2019, making it one of the youngest crypto exchanges globally and one of the fastest-growing. Phemex derivatives trading has surpassed some of the more established crypto exchanges in just over one year of operations. It is currently ranked 11th with a daily turnover of about $800 million.

Phemex derivatives markets provide perpetual contracts for BTC, ETH, Ripple, Tezos, LTC, and Chainlink. The exchange also offers a non-crypto GOLD/USD perpetual contract. Note that all contracts traded on Phemex are settled in USD except for the BTC/USD inverse contract settled in BTC. In addition, Phemex contracts offer up to 100x leverage.

Navigating Phemex’s trading platform is relatively easy. 

On the platform’s left-hand side, you can select the market you wish to trade – spot or contract market. A real-time order book is also displayed along with the chart of the chosen asset. The Phemex platform also gives you easy access to your currently open positions, closed positions, active orders, conditional orders, fills, and your order history. This makes it easy to manage your trades and track your trading history while monitoring the price charts simultaneously. 

3.2 Fascinating features of the Phemex crypto exchange that you must know

Phemex platform has a ‘data insight‘ section, which gives you detailed information about a particular tradeable crypto derivative. This section includes in-depth information on signals, token summary, daily active addresses, and search trends. 

This section provides a wide range of information for perpetual contracts offered by Phemex. They include expiry date, initial and maintenance margin, funding rate, funding interval, next funding, predicted rate, mark price, mark method, risk limit and risk step, open interest, 24-hour turnover, contract size, and maximum order quantity.

Below is an illustration that explains some of the salient features offered by the Phemex exchange.

3.3 What makes Phemex a one-of-a-kind exchange for trading crypto derivatives?

• Phemex registration – Creating a derivatives’ trading account with Phemex is the easiest as this exchange has no KYC policy. All you need is to fill in your email address and enter a password, which should take you less than a minute. 

You can sign-up with the Phemex exchange from here. 

• Trading with Phemex – Opening and closing positions with Phemex is relatively easy and straightforward. You have a wide range of order types to choose from – market orders, close on trigger orders, post only, reduce only, bracket orders, good till cancel, fill or kill, and “immediate or cancel” orders. With every position you make, you have the freedom of selecting your preferred leverage up to 100X.
• Phemex security – for wallet security, Phemex has implemented a Hierarchical Deterministic Cold Wallet System designed to ensure double-entry bookkeeping, hence securing clients’ funds. It also has system security of its machines secured on the Amazon Web Service (AWS) Cloud.

Talking about the safety and security of client funds in a recent interview, Jack Tao (CEO, Phemex) said ‘Always think about the client: what they need, and how to make sure their funds are safe, instead of just thinking about making money.”

• Phemex fees – Phemex does not charge deposit fees and has very low and competitive withdrawal fees. Contract trading fee on Phemex includes a taker fee of 0.075% and a maker reward fee of 0.025%. There is also an initial margin fee of 1% and a maintenance margin fee of 0.5%. The fees charged by Phemex are in line with industry standards. 

We hope you found this article informative. In case of any questions, please let us know in the comments below. Cheers. 

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