The crypto options market has been evolving rapidly over the second quarter of 2020. According to TokenInsight’s recent crypto derivatives industry report, trading volumes are seeing a 166% year-on-year increase compared to Q2 2019.
The derivative products driving these volumes are futures and options. While futures grow with traders betting on a bullish price sentiment, both open interest and volumes of options have reached all-time highs.
On Wednesday, open interest in Ether (ETH) options hit an all-time high of $351 million on Deribit and $37 million on OKEx. In fact, open interest in Ether options is 2.5 times higher than it was at the start of July.
A day prior to the major Bitcoin (BTC) options expiry event seen on July 3, Bitcoin options interest hit an all-time high of $1.7 million on Deribit and $268 million on CME, while daily volumes on Deribit doubled their all-time high, surpassing 47,500 contracts traded on July 28.
This all-time high seen the day before its expiration on the last Friday of the month could often mean the increasing acceptance of options and structured products, especially considering the record OI’s hit even on CME, which is the largest derivatives exchange in the world.
Luuk Strijers, the chief commercial officer of Deribit, spoke of OI being the best indicator to gauge the market, telling Cointelegraph: “Open interest is the best indicator to assess market adoption, and looking at the charts, it is apparent we are close to the end of July highs.” He added: “BTC options open interest is currently 116K contracts with a notional value of USD 1.5 billion.”
New horizons for investors
Options are financial instruments that allow investors to buy or sell an underlying asset depending on the type of contract they hold. Call options give holders the right to buy an asset at the strike price within a certain timeframe, while put options give holders the right to sell an asset in similar conditions. Denis Vinokourov, the head of research at BeQuant — a crypto exchange and institutional brokerage provider — told Cointelegraph:
“Options are a very efficient way to hedge exposure to the underlying product, be that Bitcoin or Ethereum spot or even futures/perpetuals. In addition to that, it is easier to structure products that would offer ‘yield,’ and it is this that has been particularly appealing to market participants, especially in the wake of sideways market price action.”
Lennix Lai, the director of financial markets at OKEx crypto exchange, told Cointelegraph that traders should be wary, as “high OIs alone do not indicate the market is bullish or bearish,” further adding that investors incline toward long strategies:
“We have recognized that there are a lot more professionals who are leveraging options for hedging their long-only BTC portfolio. And there are lots of more structured products available in the market tailored to professionals for the sake of yield enhancement or exotic payoff.”
With Bitcoin price briefly surpassing the $11,900 mark several times earlier this month, the general interest in cryptocurrencies has been on the rise. Bitcoin has rallied 27% since July 1, which is the highest spike seen in 2020. Bitcoin options are currently trading mainly on Deribit, CME, OKEx and LedgerX, while Bakkt, a crypto exchange owned by major traditional exchange Intercontinental Exchange, sees zero options volumes despite having the product listed.
Additionally, the put-call ratio has increased from 0.52 month over month to 0.76 on Aug. 6, which means that a greater proportion of put options were sold as compared to call options. This is a strong indicator of the bullish sentiment that investors currently hold. Lai added to this notion:
“Looking at the growing demand for Bitcoin options, OI and volume, it would seem to suggest that investors are still bullish on Bitcoin price, and with the greater macro factors such as the drop in the U.S. dollar price and an all-time high in gold, the demand for Bitcoin, in general, is rising.”
Ethereum 2.0 and DeFi drive demand
More investors seem to be acquiring ETH exposure using options in 2020. Ether, being the runner up to Bitcoin in the cryptocurrency space, has become one of the main experimental labs for blockchain scalability backed by large institutional and entrepreneurial development communities. Therefore, it’s natural for ETH to become a speculative asset as more decentralized applications are developed.
Related: Ethereum 2.0 Staking, Explained
The upcoming Ethereum 2.0 proof-of-stake shift for Ethereum and the rapid growth of the DeFi space have proved to be big variables driving the bullish sentiment while adding more credibility to the network. Seeing that Ether options are mainly traded by retail investors, at this point, as they are not traded in regulated exchanges like CME and Bakkt just yet, the growth is further testament of the community’s interest. Strijers elaborated more on the statistics of Ether options and futures traded on Deribit saying:
“The number of use cases for ETH keeps growing, and investors buy into this potential. Deribit ETH options open interest has grown 7x from USD 30–50 million six months ago to USD 350 million now which represents a 90% market share. And while ETH spot prices are peaking, the same applies to ETH futures open interest, which is almost reaching USD 1.5 billion, a new all-time high.”
Posting monthly gains of over 60% and YTD gains surpassing 200%, ETH broke the $400 price mark at the start of August. The impact of the release of Ethereum 2.0’s final PoS testnet “Medalla” and the implications it will have on the DeFi space are now being taken in by the market. Institutional interest has also appeared in the news — like Arca Labs launching an Ethereum-based fund registered with the United States Securities and Exchange Commission.
Growing the pie?
While Deribit currently occupies the largest market share of the options space, there are new players who have been trying to capitalize on this surge in investor interest. While Strijers welcomed more competition in the space since it would help the pie to grow, there may be certain complexities involved, according to Lai:
“One of the prerequisites of a liquid options market is an equally or even more liquid futures market. Not to mention the complexity of handling the liquidation, mark price and margining, which is far more complicated than delta product-like futures.”
Vinokourov furthered this perspective by comparing the differences in running a crypto derivatives exchange to a spot exchange. He revealed that the main challenges surround maintaining a liquid order book “across a variety of expiries and strike prices, with a matching engine robust enough to withstand sudden bursts of volatility,” in addition to an institutional-grade system to manage risks. He further opined:
“If all that wasn’t enough, client acquisition is that much more difficult than spot equivalent because there are fewer firms that trade these products, and they require institutional-grade client management — something that crypto exchanges are not always able to offer.”
Irrespective of how the options pie is split, arguably, it’s only set to grow even further in size, especially through exchanges like CME now becoming a more prominent player in the space. The bullish sentiment of BTC and ETH will serve to support this growth further by allowing investors more opportunities to speculate.
Ethereum: Is the HODLing in yet?
When it comes to the altcoin market, the past few months have shown how important a cryptocurrency Ethereum is. With DeFi growing substantially in 2020, the gains have been felt by ETH in many ways. While ETH has miles to go before it can challenge the market cap and dominance of Bitcoin, its remarkable growth thanks to DeFi and the proposed ETH 2.0 shift cannot be overlooked. With Ethereum’s use cases diversifying, users and investors within the ecosystem are reaping its benefits too.
According to recent network data provided by Glassnode, Ethereum balances on centralized exchanges have fallen substantially over the past few weeks. In fact, the aforementioned data showed a drop from over 18,750K to around 16,750K, resulting in Etherum balances on exchanges falling to their lowest level for the year 2020, at the time of writing.
While this drop may seem alarming to some, it also illustrates a silver lining of sorts for the cryptocurrency. A fewer number of users are now holding their Ethereum on exchanges. Instead, they are moving them to cold storage or cold wallets – a sign commonly associated with increased hodling sentiment. As more users hold on to their Ethereum, the price of the cryptocurrency is also likely to be positively impacted.
One of the reasons why many users are feeling inclined to do so can be due to its recent performance, as well as its ability to derive growth from a booming DeFi ecosystem that is based on its platform.
In fact, it is also interesting to note that over the same timeframe, Ethereum addresses with greater than 10 ETH have also seen a significant rise. According to network data provider Glassnode, such addresses have risen from 275K to 283K in the last three months alone.
One of the key reasons behind the aforementioned drop in Ethereum stored on exchanges ties back to increased hodling sentiment within the Ethereum community, as highlighted above. This, coupled with a rise in Ethereum locked in smart contracts (Since investors are looking to generate greater returns at a time when Etherum’s price is consolidating on the charts), bodes well for the cryptocurrency’s ecosystem.
Brace for it – Bitcoin Futures may be nearing a tipping point
What’s the tipping point for Bitcoin Futures on top derivatives exchanges like the CME, an exchange that has recorded a daily trading volume of over $300M and Open Interest of over $400M, consistently, for the past 3 months.
Well, a small shift in Open Interest or trading volume can have a cascading effect on Bitcoin Futures’ performance in the next 180 days. Such a shift will be influenced by several factors, and it begins at the tipping point. Three factors, to be more specific.
In the current phase of Bitcoin’s market cycle, these factors are more relevant for traders on derivative exchanges. This becomes more evident when the Liquidations chart for BitMEX is observed. Over the past 3 months, sell liquidations have paid for buy liquidations. However, over the last few days, this trend has been reversed, and buy liquidations have covered for sell liquidations on BitMEX.
The point here is to detect the source of the domino effect before the dominoes start falling. In the case of Bitcoin Futures, the tipping point may be closer than anticipated.
One of the top factors influencing the tipping point is the Law of the Few.
The Law of the Few states that “the success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts.”
In the case of Bitcoin, institutional investors, derivatives traders, and whales fit the bill. The success of Bitcoin Futures in the global trading community heavily relies on institutional investors trading on CME. In fact, the daily trade volume and Open Interest on CME influence the trading sentiment across spot exchanges as well.
The last time a cascading effect was witnessed was when BTC Futures’ Daily Trading Volume hit $445M on CME and there was a rally all the way up to $614M. At the time of writing, the Daily Trading Volume was up 63.3%, when compared to the figures 6 months ago, and it has the potential to hit $614M with one move in the right direction.
This effect heavily relies on another key factor – The Stickiness Factor.
Back in 2017, when Google search results for “Bitcoin” and “Crypto” broke the record, the trading community witnessed a historic Bitcoin bull run and altcoin rally. Institutional interest and growth of Bitcoin derivative products ensued. A similar event transpired when Bitcoin Futures’ aggregated daily volume hit $184B on 27 July 2020. This event was a unique occurrence, and it made Bitcoin Futures stick in the portfolio of the average institutional investor and the derivatives trader.
The aggregate trade volume hasn’t dropped to pre-July 2020 levels since then. Despite drops in Bitcoin’s price on spot exchanges, Futures contracts continue to trade at a premium and there is more optimism. Volume is not directly impacted by Bitcoin’s price and when the spot market is riddled with bearish sentiment, long contracts continue feeding shorts on BitMEX. This stickiness is a driver of the aforementioned tipping point.
Inching closer to the tipping point, the powerful context is the rise of stablecoins and their instrumental role in lowering the barrier to entry on spot and fiat-crypto exchanges.
Over the past three months, stablecoins like USDT have added $100M in volume every day and their market capitalization and dominance have risen tremendously. In fact, Tether has also crossed a market capitalization of $15B.
This directly influences the tipping point for Bitcoin Futures as it makes Futures trading more accessible to traders. Bitcoin held on exchanges has nearly doubled over the past month, corresponding to an increase in Tether’s market capitalization and circulation. This resonates with derivatives traders who opt for physically-settled Bitcoin Futures contracts on exchanges like Bakkt. In fact, on Bakkt, the daily trade volume was upwards of $80M for the past week, while the Open Interest has been consistently above $10M.
All of these factors are highlighting a shift in derivatives traders’ strategy, while also underlining increased activity on derivatives exchanges. The race to the tipping point has begun – An increase in aggregate trading volume on physically-settled Futures contracts or CME may trigger the much-awaited domino effect.
Tron, Synthetix, VeChain Price Analysis: 19 September
Tron was observed to have hit a strong zone of resistance, before being rejected and pushed to the downside, at the time of writing. In fact, such bearish momentum appeared likely to continue for TRX. At a time when Ethereum was increasingly being criticized for high Gas fees and a congested network, it could have been Tron’s moment to shine, but things didn’t pan out that way at all.
TRX was seeing oversold conditions a few days ago when its RSI hit a low of 23, before ascending just past 50. However, the RSI was unable to remain above 50, and its drop beneath the level highlighted the fact that TRX’s recent 12% surge from $0.263 to $0.296 was merely a bounce.
TRX found a zone of strong resistance at $0.3 and looked likely to drop towards the support at $0.265.
Interestingly, a recent Reddit post has raised questions about JustSwap’s vetting process, claiming that the Tron Foundation has whitelisted a DeFi project that has since pulled a $2 million exit scam. This, despite DappRadar listing the project as “high-risk.”
Synthetix underlined the possibility of dropping lower on the charts. The Directional Movement Index did not yet show a strong trend, but ADX (yellow) was inching towards 20 and could move further north. Also, the rising -DMI (pink) denoted a bearish trend.
Over the past week, every SNX bounce off the level of support has been overwhelmed by selling pressure. This can be expected to continue. With the price registering lower highs, the way down remained the path of least resistance for SNX.
The next level of support after $4.23 lay at $3.36, representing a 20% depreciation.
VeChain showed bullishness in the market after a period of consolidation. The Bollinger Bands expanded to indicate heightened volatility, while the price broke out towards the upper band. At the time of writing, the price was staying above the 20-period moving average, a moving average that could be tested as support as VET steadily climbs toward its resistance around the $0.158 zone.
The breakout was also accompanied by high trading volumes, legitimizing the breakout.
Ethereum: Is the HODLing in yet?
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