Derivatives play a key role in institutional investment strategies. The increasing availability of crypto-derivatives makes the blockchain asset class more attractive to institutional investors.

The supply of crypto-derivatives is growing. Last week, the Chicago Mercantile Exchange (CME) was the first established exchange to launch options on Bitcoin futures. Institutional crypto investors can now trade another crypto-derivative on CME, which they have long known from the traditional financial sector. 

The crypto-derivatives market keeps growing

The market for crypto-derivatives has exploded in recent years and the trading volume is now ten to twenty times greater compared to the spot market. However, the supply of derivatives is still limited, especially on regulated exchanges. CME has been one of the few established trading platforms to offer crypto-derivatives at all – but until last week, only Bitcoin futures have been available. 

Options and futures offer similar opportunities: They enable traders to generate profits from future price movements. However, they differ in terms of their risk profile and functionality. Unlike a futures contract, an option contract does not oblige the option holder to buy or sell the underlying asset but merely gives him the option.

Institutional investors need access to established exchanges 

Bitcoin options are nothing new. On exchanges like Deribit or Quedex, they have already been available for trading for a longer time. Nevertheless, the launch on CME is a milestone for the industry, because compared to crypto exchanges, the CME is one of the world’s leading derivatives exchanges and enjoys the trust of institutional investors. 

The trading volume of the new Bitcoin options on CME was at almost $2.1 million on the first day of trading. By comparison, the volume of futures contracts on the crypto exchange Bakkt was less than half of that. 

It is not only the reputation of CME that matters; it’s also about compliance. Institutional investors are much more restricted in their activities than private investors, as they usually do not manage their own money. Access to derivatives on regulated and established exchanges is therefore crucial for institutions.

Derivatives enable price speculation and risk management 

Crypto-derivatives are controversial in the industry. Regulatory authorities have repeatedly pointed out the price manipulation risks in crypto markets. 

As Bitcoin liquidity is still relatively low, individual market participants can manipulate the spot price by placing large sell orders. At the same time, they bet on falling crypto prices in the derivatives market through the use of futures or options. Blockchain analysis firm Arcane Research showed that there is a strong correlation between the monthly expiration of CME futures contracts and a falling Bitcoin price. They saw this as evidence of Bitcoin price manipulation – but could not prove it. 

On the other hand, institutional investors also use derivatives for risk management purposes, because futures and options can limit possible losses in Bitcoin trading. A broader supply on an established exchange is therefore a positive development.