London: Crypto exchanges are rushing to fill the void left by FTX, once one of the largest derivatives exchanges for digital assets, as the cash market faces declining volume and liquidity.
FTX’s collapse has become an opportunity for other exchanges to capture market share or enter a space now dominated by Binance, the world’s largest crypto exchange. Some exchanges showed interests in buying FTX’s derivatives platform in the US, while others are just looking to build brand new derivatives exchanges. At the same time, the demise of several crypto lenders like Genesis Global Holdco LLC have left traders looking for other ways to leverage their positions.
“There is a clear vacuum left in the crypto derivatives market, especially for regulated entities,” Tarun Chitra, partner at crypto venture fund Robot Ventures, said. “We’ve seen a number of companies show up on the centralized side as well on the decentralized side to fill this vacuum.”
As lenders like Genesis and Voyager Digital have gone bankrupt, derivatives platforms are one of the few remaining venues that let traders, especially institutional trading desks, lever up their trades in crypto. Institutions prefer products such as futures and options over spot trading because “derivatives enable them to have the ability to go long-short and express their view and hedge the portfolio,” said David Martin, head of institutional coverage at digital asset prime brokerage FalconX.
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For hedge funds who primarily trade on US-based exchanges like CME Group Inc., the cash-settled futures contracts also prevent them from getting into nuanced crypto-specific problems such as custody, he added.
Some offshore derivatives exchanges offer a maximum leverage of 100 times for some cryptocurrencies, even after Binance, for example, said that it was reducing the maximum leverage a user can take to trade futures contracts to 20 times from 100 times.
The shakeup in the crypto industry, “opens up a lot of opportunities in the market because both FTX’s literal market share not existing anymore, and also their brand as somebody that was building innovative things in the space obviously no longer being the case,” Antonio Juliano, founder and CEO of decentralized exchange dYdX, said in an interview.
Both dYdX and its peers such as GMX were direct beneficiaries of the FTX implosion in November and immediately saw trading volume pick up.
Now that FTX is gone, exchanges like Blockchain.com and Gemini are showing interest in buying FTX-owned LedgerX, which is registered with the US Commodity Futures Trading Commission as a derivatives exchange. Meanwhile, one of the largest crypto market makers, Wintermute, recently said that it is “seriously” considering launching a derivatives exchange for professional traders. And former Jefferies Financial Group executives just launched a new crypto exchange that will eventually expand to derivatives. This is all happening as Binance’s derivatives business in Australia is under review.
For crypto exchanges aiming to diversify their revenue streams, expanding into institution-focused derivatives can help them weather bear markets. Many exchanges primarily rely on revenue from transaction fees collected from spot trades by retail traders, whose interest in crypto has waned, particularly after FTX.
The recent price rally in Bitcoin has also given derivatives a boost. The world’s largest digital asset in market value eyes an important milestone of $30,000 after gaining about 25 per cent since March 8 following the Silicon Valley Bank fallout.
Derivatives offer traders a way to capitalize on market volatility while managing risk in unpredictable market environments. More investors are looking for market exposure especially in derivatives amid the price volatility, according to Luuk Strijers, chief commercial officer at derivatives exchange Deribit, which just announced its plan to launch futures contracts to facilitate Bitcoin volatility trading.
“When the market is moving sideways, we see our volume decline,” Strijers said. “However, when markets move “ up or down. In those moments, people tend to use options, and of course, we benefit from that.”