Derivatives play an important role in the traditional market and crypto derivatives are a new chapter in cryptocurrency offerings that can drastically change the game and make the crypto more reliable and legitimate for all investors and traders.
According to Bloomberg.com Nasdaq.Inc is figuring out the logistics on offering Bitcoin futures, and according to another source, German stock exchange operator Deutsche Boerse, one of the world’s largest trading centers for securities, is also considering to offer Bitcoin futures.
But let’s back up a bit and learn more about traditional derivatives.
What are derivatives?
A financial derivate is a contract between two or more parties, whose value depends on the underlying assets, such as bonds, currency, bonds, coins. Change in the value of underlying asset causes a change in the value of the derivative. Financial derivatives have two main uses: to hedge risk or to speculate.
When used as a tool for hedging risk, traders are usually trying to minimize risk in the physical market that protects from a sudden spike or a downfall in the price of the underlying asset, inflation, currency fluctuations and others. Traders who use derivative for speculation are motivated by profit, rather than the desire to mitigate risk.
There are four kinds of derivatives. Forward contracts are more for hedging and represent a contract to buy or sell at a fixed price sometime in future, such contracts are not traded on exchanges, thus, as a result, they are not standardized or regulated. Future contracts hold similar purpose, but they are regulated and traded on exchanges. Options give a right to buy an asset in the future but do not put an obligation on another party. And finally, swaps allow you to exchange one security to another.
How can they help the crypto market?
Cryptocurrency derivatives could boost liquidity and trading volumes for digital coins. If available, the option to invest in cryptocurrency through derivatives may attract institutional and traditional investors thus generating cash flows into the crypto markets. And a higher trading volume will subsequently result in less volatility. A boom in institutional investors can also cause a bull run market.
Second, the introduction of crypto derivatives could turn a push to shove when it comes to government regulations. Many governments around the world have been already drafting or introducing crypto regulations, derivatives could show the staying nature, as well as the credibility of crypto. If an exchange wants to offer crypto futures, then it needs to be regulated thus causing it to be more legitimate and secure for investors. Crypto derivatives can help the crypto market to become a stabilized and developed financial institution, accountable to the government and its participants.
International Community Watchdogs
International agencies are already investigating the impacts of cryptocurrency on the global economic stability. The Financial Stability Board, an international agency consisting of 68 institutions such as central banks, watchdogs, and ministries of finance systems, released a paper titled “Crypto-asset markets: Potential channels for future financial stability implications” with their findings.
According to the report, the bankers observe no substantial dangers in cryptocurrencies, as their total market capitalization was at $830 billion at its peak and has since dropped to $210 billion, which barely reaches 2 percent of the global value of gold. However, the FSB warns regulators to watch the crypto market closely and to keep tabs on its rapid growth.
Crypto derivatives could transform the crypto market and make it more accessible and appealing to both institutional and traditional investors. The invisible baggage, however, in terms of strict regulations and enhanced level of accountability is something that many exchanges will have to grapple with. Many analysts predict a bull run market, but whether it will be caused amid a surge in the crypto popularity or crypto derivatives remains to be seen.
Originally published on Medium.