2020 has been the most significant year for the crypto derivatives market so far. Both Bitcoin (BTC) and Ether (ETH) derivatives have grown steadily over the year, with their futures and options products available on exchanges such as the Chicago Mercantile Exchange, OKEx, Deribit and Binance.

On December 31, open interest rates in Bitcoin options hit a record high of $ 6.8 billion, which is three times the OI of 100 days before, indicating how fast the crypto derivatives market is growing during this bull run.

The bull run has led many new investors to enter the market amid the uncertainty plaguing traditional financial markets as a result of the ongoing COVID-19 pandemic. These investors seek to hedge their bets against the market through derivatives of underlying assets such as Bitcoin and Ether.

Institutional investors are making the most significant change

While there are multiple factors driving the growth of crypto derivatives, it is safe to say that it is primarily driven by the interest of institutional investors as derivatives are complex products that are difficult for the average retail investor to understand.

In 2020 several business entities such as MassMutual and MicroStrategy showed significant interest buying Bitcoin for their reserves or as treasury investments. Luuk Strijers, chief commercial officer of crypto derivatives exchange Deribit, told Cointelegraph:

As Blackrock’s Fink put it, ‘cryptocurrency is here to stay’ and bitcoin ‘is a sustainable mechanism that could replace gold.’ Statements like these have been the driving force behind recent achievements, but as a platform we’ve seen new entrants join throughout the year.

Strijers confirmed that as a platform, Deribit sees institutional investors entering the crypto space using trading tools they are familiar with, such as spot and options, leading to the massive growth of open interest in 2020.

The Chicago Mercantile Exchange is also a prominent marketplace for options and futures trading, especially for institutional investors, as the CME is the world’s largest trading exchange for derivatives across different asset classes, making it a trusted marketplace for institutions. It has even been recently has overtaken OKEx as the largest Bitcoin futures market. A CME spokesperson told Cointelegraph, “November was the best month of Bitcoin futures (ADV) average daily volume in 2020 and the second best month since launch.”

Another indicator of institutional investment is the growth in the number of large open interest holders, or LOIHs, of CME’s Bitcoin futures contracts. A LOIH is an investor who owns at least 25 Bitcoin futures contracts, with each contract consisting of 5 BTC, making the LOIH threshold equal to 125 BTC – over $ 3.5 million. The CME spokesperson further elaborated:

“We had an average of 103 large open interest holders during the month of November, which is up 130% year over year, and hit a record 110 large open interest holders in December. The growth of large open stake holders can be seen as an indication of institutional growth and participation. “

The fact that there is now demand for the crypto derivatives market is a sign of maturity for assets like Bitcoin and Ether. Like their role in traditional financial markets, derivatives provide investors with a highly liquid, efficient way to hedge their positions and mitigate the risks associated with crypto asset volatility.

Other macroeconomic factors are also driving demand

There are several macroeconomic factors that also increase the demand for the crypto derivatives market. As a result of the COVID-19 pandemic, several major economies, including the United States, the United Kingdom and India, have come under pressure due to limited working conditions and rising unemployment.

This has led several governments to roll out stimulus packages and implement quantitative easing to lessen the impact on the grassroots economy. Jay Hao, CEO of OKEx – a crypto and derivatives exchange – told Cointelegraph:

“With this year’s pandemic and many governments’ reactions to it with massive stimulus packages and QE, many more traditional investors are turning to Bitcoin as a potential inflation hedge. Cryptocurrency is finally becoming a legitimized asset class and this only means a greater increase in demand. “

There is a growing interest from the mining community and other companies that monetize Bitcoin and want to hedge their future earnings in order to pay for their operating expenses in fiat currencies.

In addition to institutional demand, there is also a significant increase in retail activity, Strijers confirms: “The unique accounts that are active every month in our options segment continue to rise. Reasons are the general (social) media attention to the potential of options. The CME spokesperson also stated:

“In terms of new account growth, a total of 848 accounts have been added so far in the fourth quarter of 2020, the most we’ve seen in any quarter. 458 accounts were added in November alone. In 2020 so far, an average of 8,560 CME Bitcoin futures contracts (equivalent to approximately 42,800 bitcoin) were traded daily. “

Ether derivatives are growing thanks to DeFi and Eth2

Aside from Bitcoin futures and options, ether derivatives have also grown tremendously in 2020. The CME even announced that it launch of Ether futures in February 2021, which in itself is a sign of the maturity Ether has attained in its life cycle.

Previously, the crypto derivatives market was monopolized by products using Bitcoin as the underlying asset, but in 2020, ether derivatives grew to take a significant share of the pie. Strijers elaborated further:

“If we look at the value of the sales in USD, we see that on Deribit BTC derivatives contributed most of the volume, but the percentage has fallen from ~ 91% in January to ~ 87% in November. During the DeFi summer’s peaks, the BTC rate declined until the mid-1970s due to increased ETH activity and momentum. “

The reason Bitcoin derivatives make up a larger share of the crypto derivatives market is that BTC is now well understood by the market and has been validated by major institutions, governing bodies and several prominent traditional investors. However, in 2020 there were also several factors influencing the demand for ether derivatives. Hao believes that “the tremendous growth in DeFi in 2020 and the launch of the ETH 2.0 Beacon chain has certainly led to increased interest in Ether and therefore also in Ether derivatives.”

While Ether continues its bull run alongside Bitcoin and is likely to see further increases in derivatives demand, it is highly unlikely that BTC will catch up anytime soon. Hao further explained, “We will see rising demand for both products, but BTC as the number one cryptocurrency will likely see the strongest growth as more institutional dollars flood the space.”

2021 promises to be a crucial year

Starting with the launch of CME’s Ether futures product in February, this year will be an even bigger year for crypto derivatives as the bull run continues. The market also recently witnessed the expiration of the biggest options to date, with nearly $ 2.3 billion in BTC derivatives expiring on Christmas.

In traditional markets, the derivatives market is several times larger than the spot market, but in crypto markets it is still the opposite. So it seems that the crypto derivatives market is still in its infancy and will grow exponentially as the industry gets bigger. As volumes increase, markets tend to become more efficient and provide better pricing for the underlying asset, as Strijers adds:

“Due to the overall increase in market interest, […] We see more market makers citing our tools, giving us more opportunities to launch more series and expiries, and tightening the spreads that serve as a foothold for further interest as execution becomes cheaper and more efficient. “

In addition to Bitcoin and Ether derivatives, there are altcoin derivatives products offered on various exchanges, popularly called perpetual swaps, but also options and futures. Hao elaborated on these products and their demand outlook:

“Many other altcoins are already being offered to trade derivatives, particularly in perpetual swap but also in futures. […] Demand for this is largely driven by retailers, as some of these assets have not yet gained the confidence of institutional traders. “

While institutional investors are not yet flocking to the derivative products of these altcoins, that will change with the continued growth of decentralized financial markets and the use cases they can provide. This could eventually translate into an increase in demand for more crypto derivatives in the near future.