Bottom-line Bitcoin derivatives market: 9 wins and 1 loss, or all losses, wandering in the gray area
Since late October 2020, while Bitcoin has accelerated its rise, the price volatility has increased, and some investors have also poured into the Bitcoin derivatives market.
On January 21, the price of Bitcoin fell below $32,000, a 10.3% drop from the highest price in 24 hours.
Previously, on January 11, the price of Bitcoin fell by 27.78% from the highest price of $41962. On January 4, it fell from more than $34,000 to about $28,000 in one day.
Among the many influencing factors, some analysts believe that behind the dramatic fluctuations in the price of Bitcoin is the growing size of the derivatives market.
Researchers from the cryptocurrency data analysis platform Skew.com recently wrote on Twitter: “The open interest of Bitcoin futures is rapidly rebounding to a record high.” According to the chart provided by it, since late October 2020, Bit The open interest of currency futures has been in an upward trend.
Since late October, the growth trend of open positions in Bitcoin futures on various exchanges Source: Skew.com
Compared with spot transactions, Bitcoin derivatives transactions currently occupy a larger market volume.
According to The Paper, in addition to spot trading, Bitcoin currently has leveraged trading, as well as derivatives trading such as futures contracts and option contracts.
Among them, leveraged trading is also based on spot trading, so some industry insiders and exchanges do not regard it as a cryptocurrency derivative.
However, this type of transaction is also different from spot trading, which can be understood as the type of products derived from spot trading, and can achieve the effects of derivatives.
Leveraged trading: leverage 2-10 times, providing investors with short-selling opportunities
Leveraged trading is a way for investors to use funds provided by a third party to trade assets.
In traditional financial markets such as the stock market, leveraged trading is also called margin trading. Investors can borrow funds from stock brokers to buy stocks or borrow stocks to sell.
In the cryptocurrency market, the borrowed funds or cryptocurrency assets are usually provided by other users in the exchange.
Leveraged trading can be divided into long and short trading.
Take Bitcoin as an example. If investors expect the price of Bitcoin to rise, they need to borrow more stablecoins to buy Bitcoin, and then sell them to earn the difference after the actual rise.
For example, investors have 2000 USDT (TEdacoin, a stable currency linked to the U.S. dollar), which can be used as a margin to borrow 10000 USDT with a leverage of 5 times, then buy bitcoin, and sell after the price of bitcoin rises. After returning 10,000 USDT, the investor's profit is 5 times that of the 2,000 USDT in Bitcoin spot trading.
The opposite is true for short positions. If an investor expects the price of Bitcoin to fall, the borrowed Bitcoin is sold immediately and bought back when the market drops.
However, once the investor's opening direction is opposite to the market trend and the market fluctuates more than a certain percentage, and the total assets of the user's margin account are lower than the minimum margin requirement for leveraged trading, the exchange will force the sale of the user's mortgaged assets to close the position. That is, "explosion".
For example, for a long position with 5 times leverage, once the price of Bitcoin drops by more than 20%, multiplied by the leverage is 100%, and the margin will be forced to liquidate.
"It's even less than 20% to repay the debt, because leveraged trading has interest." An insider in the cryptocurrency market told The Paper.
Compared with conventional spot trading, leveraged trading means that investors can get more funds to amplify the results of the transaction, in order to obtain more profits.
And spot trading can only buy low and sell high, while leveraged trading provides investors with short-selling opportunities.
At present, the leverage ratio of leveraged transactions in the market is generally 2-10 times.
"Leveraged trading actually allows some large currency holders to hedge against foreseeable price drops when they do not want to sell the currency," said an insider in the cryptocurrency market. "Continuous arbitrage can achieve long-term arbitrage. The needs of currency holders."
For example, he said, if a large currency holder who holds 1,000 bitcoins thinks that the price of bitcoin will fall by 5 points in the short term, if it does not move, there will be losses, so 200 of them can be used as margin to open 5 times Leveraged trading is short, borrow 1000 bitcoins to sell, and then buy back after the price drops.
In this way, the loss caused by the fall in the price of the remaining 800 bitcoins can be compensated.
Futures contracts: up to 125 times leverage
In traditional financial markets, futures contracts are standardized contracts formulated by futures exchanges, which have unified regulations on the expiry date of the contract and the type, quantity, and quality of the assets purchased and sold.
The futures contracts in the cryptocurrency market have made certain innovations on this basis, and are currently divided into delivery contracts and perpetual contracts.
In the delivery contract, investors can choose to buy long or sell short contracts to obtain the benefits of rising or falling cryptocurrency prices by judging the rise or fall.
The delivery contracts of mainstream cryptocurrency exchanges generally use the mode of differential delivery. When the contract expires, the exchange will close all open contract orders.
The current delivery time of the delivery contract includes the current week, the next week, the current quarter, and the next quarter.
The perpetual contract is an innovative derivative, similar to the delivery contract, except that the perpetual contract does not have a delivery date, and users can hold it all the time and close the position independently.
Therefore, perpetual contracts, relatively speaking, lower the professional investment threshold, and investors do not need to consider the steps of delivery and swapping, which is similar to the spot experience.
"One of the major drawbacks of perpetual contracts is that the fee rate is three times a day, and settlement is once every 8 hours. If the amount of funds is very large, the amount of procedures for receiving a few ten thousandths per day will be huge for one month." The above encryption Insiders in the currency market said.
In order to ensure the long-term convergence between the perpetual contract price and the spot price, the exchange basically uses the funding rate method.
Funding rate refers to the settlement of funds between all longs and shorts in the market. If the rate is positive, the long pays the funds to the short; if it is negative, the short pays the funds to the long.
In this way, the demand for perpetual contracts between buyers and sellers is balanced, so that the price of the perpetual contract is basically consistent with the price of the underlying asset.
Compared with leveraged trading, whether it is delivery contract or perpetual contract, there are bullish and bearish, and leverage can also be used, and there is a margin.
However, leveraged trading like Bitcoin involves borrowing a third-party stable currency to go long or borrowing Bitcoin to go short. Futures contracts are not the concept of "borrowing", but long investors and short investors are counterparties to each other. Gambling, the exchange plays an intermediary role in the matchmaking.
"Compared with pure spot leveraged transactions, the utilization rate of funds is stronger," said an insider in the cryptocurrency market.
The above-mentioned cryptocurrency market industry insiders stated that if it is a long futures contract, as long as the leverage is low enough, and then use enough margin to support the bottom of the Bitcoin price limit, as long as the market finally picks up, it will finally make money .
"Contracts also have its own value. For people who are truly aware of risk control, contracts are a means to increase the utilization rate of funds, not as terrible as imagined." He said.
Futures contracts are currently the most traded derivatives.
Compared to leveraged trading, the maximum leverage of perpetual contracts and delivery contracts in mainstream exchanges can reach 125 times.
Options contracts: currently account for about 1% of futures volume
An option contract is a transaction of buying and selling rights, which stipulates the right to buy and sell a certain type and quantity of native assets at a certain time and at a certain price. It can be divided into call options and put options.
In the cryptocurrency derivatives market, the trading logic of T-quote option contracts based on the Deribit exchange is almost the same as that of option contracts in the traditional financial industry. They are all European options and can only be exercised on the expiry date. Investors Can act as option buyer or option seller.
The simple version of the new options (also called short-term options) launched by exchanges such as Binance is simpler and faster.
Investors only need to select the expiration time of the option and the purchase quantity to purchase an option, and the exercise price when placing an order is provided by the exchange in real time.
According to the product characteristics of different exchanges, it can be divided into two types: European options and American options. Compared with traditional options, its expiration time range is shorter, ranging from 5 minutes to 1 day.
Investors can only play option contracts with the exchange as option buyers.
However, the disadvantage of this option contract is that the inherent value is not transparent enough, and investors as the counterparty of the options of the exchange have to bear a higher risk, even if the price of the option is unreasonable, it cannot be learned from it.
The above-mentioned industry insiders in the cryptocurrency market said that institutions, qualified investors, Hong Kong and the mining community will recognize options more, "sometimes they hedge against some of the risks of spot fluctuations."
"For example, if I think Bitcoin may rise next time, I will buy a 50% call option, and then buy a 50% put option," he said. "In the middle, I think that after the trend has formed, I can stop another one. So you won’t lose money, the book is always kept."
Therefore, compared with other derivatives, there is no liquidation problem in option contracts.
Gu Yanxi, the founder of Liyan Consulting Company and a researcher in the blockchain and encrypted digital asset industry, told The Paper that compared with futures, the risk of options is smaller, because there are many options tools, and the biggest loss is only rights. Gold, instead of collecting margin on both sides like futures, as long as the direction of the position is opposite to the market direction, the margin will be collected or even closed if the position exceeds the limit.
The above-mentioned cryptocurrency market industry insiders stated that in the cryptocurrency market, options have not yet fully developed, and they are now in the initial stage, accounting for about 1% of futures.
"Option contracts will gradually enter more and more professional traders, including as the trend of institutionalization becomes obvious, many institutional investors may be willing to choose some option tools that they are more familiar with to achieve prices. Anchoring, or based on the long-term up or down logic it believes to be achieved, so more gameplay such as options or binary options may be developed." The industry insider said.
In addition to the above three products, the cryptocurrency market also has leveraged token trading.
In essence, it is a token with leverage function, which can provide the return of the underlying asset's leverage multiple, and its function is similar to the ETF (ExchangeTraded Fund, that is, the trading open-end index fund) in the traditional financial field.
Leveraged tokens do not require collateral and maintenance margin, nor do they need to worry about the risk of liquidation.
Behind each leveraged token corresponds to a basket of underlying positions.
Depending on the product, the actual target leverage multiples behind leveraged tokens are also different. Leveraged tokens use the exchange's position adjustment mechanism to increase or decrease the position of underlying assets to maintain the target leverage.
Risk: No risk control, 9 wins and 1 loss all lose all games
While the high leverage ratio of derivatives brings high returns, it also means that the risk of liquidation is higher in a market with violent market volatility, especially for the futures contract with the highest market share.
The above-mentioned cryptocurrency market industry insider said: "For novice users or newcomers who have just entered the market, this may be something that has gone to the grave, especially for those who are very gamblers. If you open a 100 times futures contract, if there is no Sufficient margin, as long as it fluctuates by 1%, it will die."
"You have won 9 times, but in the course of a sharp fall and a skyrocket, you took the wrong direction and everything was gone. As long as you don’t do a good job of risk control, you don’t know how to add margin, you don’t know how to divide positions. How much money you make, the mental state of being unable to sleep can be very torturous," he said.
In addition to the investment risks of derivatives, Gu Yanxi believes that in the cryptocurrency market, non-compliant derivatives exchanges also have many risks for investors: such as internal operation risks, bankruptcy risks, and runaway risks. Wait.
"For example, the internal management process is not good, the storage place is stolen, or the security mechanism is not strong, and the cold wallet private key is not stored firmly, resulting in partial or total loss of the key. For example, a centralized exchange can rewrite the ledger at will. , You can fill in infinite positions, but users don’t know." He said.
Due to the high volatility of cryptocurrency assets, it often triggers violent fluctuations in multiple derivatives markets such as leveraged trading and contracts.
The processing capacity of the trading system of the exchange is particularly critical. If users cannot perform operations such as closing or adding positions in a timely manner, huge capital losses may be caused.
In addition, due to the opacity of derivatives transactions, small-scale derivatives exchanges may commit malicious acts, which seriously damage the interests of investors.
Cryptocurrency derivatives exchanges urgently need compliance
The compliance of cryptocurrency derivatives exchanges is imminent.
At the end of 2017, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) launched bitcoin futures contracts; in the same period, LedgerX launched the first physical settlement bitcoin futures contract in the United States.
In 2019, Bakkt also launched bitcoin futures and options contracts one after another. This product is the first bitcoin option derivative approved by the US Commodity Futures Trading Commission (CFTC).
In the current cryptocurrency market, only these four domestic exchanges in the United States have been approved by regulatory authorities and operate derivatives trading in compliance.
In terms of policy, the regulatory policies of various countries' cryptocurrencies are still vague.
Gu Yanxi told The Paper News reporter: “The trading volume of these exchanges is relatively large now, and they are all registered and operated in some small places, such as the Seychelles or the Bahamas. The specific personnel may be in Singapore, Hong Kong, because operations in Hong Kong do not require strict supervision. However, Singapore and Hong Kong will also begin to supervise them. In the future, they must apply for licenses and be supervised like mainstream derivatives exchanges. If there is this requirement, the trading volume will definitely be very large. Blow."
Gu Yanxi also pointed out that the current exchanges use USDT as the main trading medium, but it is also a non-compliant USD stable currency.
Once the U.S. government sues USDT and adopts regulatory measures against it, the flow of derivatives in the derivatives market will also lose a lot, so it will be very risky.