The Q2 2023 report from Genesis Trading sheds light on the evolving dynamics of the cryptocurrency market, particularly focusing on the anticipated rise in crypto derivatives.
As spot market liquidity has taken a downturn, with persistent issues in spot order book depth, the emphasis on derivatives has grown substantially. Genesis Trading emphasized this shift by stating, “Given the decline in spot market liquidity and the consistent thinning of the spot order book, the direction of future crypto volume growth is unmistakably towards derivatives.”
The second quarter painted a telling picture. Even with the Bitcoin (BTC) price oscillating between $27,000 and $30,000, 20 cryptocurrency exchanges managed to amass a total spot trade volume of $1.67 trillion. This figure marks a significant 36% dip from the preceding quarter.
Such a reduction underscores the diminishing liquidity within the crypto market, prompting innovators and market leaders to consider crypto derivatives as a solution to counterbalance the declining spot market activity.
This decline in market activity isn’t arbitrary. Multiple influential factors have contributed, including the proposal for a Bitcoin exchange-traded fund (ETF) and the consequential actions and decisions of the Securities and Exchange Commission (SEC), which have undeniably impacted market behavior and trends.
Bittrex’s involvement in trading allegations pertaining to unregistered securities set off a ripple effect throughout the cryptocurrency market, marking the beginning of a marked decline in spot trading activities. The consequences of these allegations were immediately evident as trading activity on Bittrex took a nosedive.
But the ramifications didn’t stop there. The SEC, which is deeply concerned about maintaining regulatory compliance, shifted its attention to other dominant forces in the crypto trading world, with Binance US, Binance, and Coinbase coming under the spotlight.
These major exchanges faced accusations similar to Bittrex—specifically, their alleged involvement in offering unregistered securities. Such allegations only added fuel to the already worsening situation, further dampening the already declining spot trading enthusiasm. According to analytics from Kaiko, spot trading volumes shrunk to their lowest since 2020.
The SEC’s assertive stance and actions had a broader impact than just spot trading. It led to a liquidity crisis for several leading tokens. Bittrex, already reeling from the initial allegations, endured a substantial liquidity contraction of approximately 68%. Meanwhile, Binance US and OKCoin suffered even more severely, with both platforms experiencing a shocking 85% evaporation of liquidity. Other major exchange giants weren’t spared either. Coinbase, Kraken, OKX, and Huobi, to name a few, saw their spot trading volumes slashed by over half in Q2.
Such widespread consequences highlight the importance of regulatory bodies in shaping market dynamics and emphasize the delicate balance these markets operate within.
Expanding Crypto Derivatives Market: Driving Institutional Adoption Amidst Regulatory Uncertainty
The recent report from Genesis underscores the evolving dynamics of the cryptocurrency market, particularly in response to declining liquidity in the spot market. As clarity in US regulations remains elusive, market participants are actively scouting alternative mechanisms for trading cryptocurrencies, with crypto derivatives emerging as a promising solution.
Crypto derivatives, essentially financial contracts whose value is derived from underlying cryptocurrencies, could be pivotal in fostering global institutional adoption. As traditional financial entities increasingly immerse themselves in the crypto realm during Q2, this marks a broader trend towards recognizing the legitimacy and potential of digital currencies.
Genesis predicts a bullish future for the crypto derivatives market based on comparative analysis with traditional finance. Drawing parallels with the traditional financial world, the report cites a notable 2021 trend: “For the first time, the notional volume of equity options in the US surpassed the traded value of the underlying equities.” Extrapolating this trend to the cryptocurrency derivatives market, Genesis suggests that there’s potential for a massive 10-fold expansion from its current standing.
If this projection comes to fruition, the landscape of the cryptocurrency market could see a significant transformation, with crypto derivatives becoming a dominant force in driving both volume and value.
The Genesis report delves deep into the nuances of the crypto derivatives landscape during Q2 2023, highlighting pivotal moments and key players that have shaped the sector.
One of the standout achievements came from Deribit, a renowned options exchange. It made headlines by setting a new benchmark, recording the maximum number of option contracts traded within a single day throughout the year. The timing of this record was significant, coinciding with Bitcoin’s rebound past the $30,000 mark. This event accentuated the symbiotic relationship between the crypto spot price shifts and surges in derivatives trading.
Coinbase, one of the leading cryptocurrency platforms, also took noteworthy strides in this quarter. The platform expanded its offerings by rolling out institutional-caliber fixed-date and perpetual futures in June, indicating its commitment to cater to sophisticated and large-scale investors and traders.
Lastly, the Chicago Mercantile Exchange (CME), a staple in the traditional financial world, didn’t remain on the sidelines. It too showcased robust growth in the crypto derivatives sector. By July, CME had experienced a significant rise in derivatives volumes, growing by nearly a quarter and clocking in at around $1 billion.
These insights from the report attest to the burgeoning importance of the crypto derivatives sector and the active role of major institutions and exchanges in shaping its trajectory.
