For cryptocurrencies to fully mature, regulated derivatives will be non-negotiable.
Derivatives already account for 70-75% of crypto trading volume, with institutional investors leading the way. Although the number of regulated services is increasing, the majority of that volume (approximately 95%) takes place in “offshore” venues, i.e., unregulated or less regulated jurisdictions. This exposes investors to risks such as market manipulation and fraud, and leaves consumers without protection.
Fortunately, especially in Europe, there are increasing avenues for crypto exchanges to meet the demands of risk-averse institutional investors whose primary concerns are compliance, security, and regulation.
What we can learn from market history
Historically, spot markets have served as a fundamental source of liquidity and a venue for initial price discovery. As markets mature, derivatives markets often take the lead by incorporating broader information and future expectations. This change has already been observed in commodity and stock markets around the world, indicating a shift towards more sophisticated trading strategies, a key indicator of market maturity.
Similarly, in the crypto space, access to both spot and derivatives trading is essential for a mature and balanced crypto market. Futures and options play, and always have played, an important role in risk management, hedging, and improving capital efficiency. These are critical to attracting continued participation from institutional investors, increasing capital efficiency, and enabling a wide range of trading strategies.
However, only regulated exchanges can provide the security and compliance essential for large financial customers. Obtaining a MiFID license is mandatory for crypto exchanges to offer EU-regulated crypto derivatives such as perpetual swaps. There is no doubt that the demand for derivatives is growing and is worth approximately $3 trillion. MiFID brings much-needed transparency and protection to the cryptocurrency market, providing oversight in tandem with traditional financial services. This increases market integrity and helps curb fraud.
Regulated exchanges can attract a wide range of institutional customers with demand for crypto derivatives. And they can be a source of innovation. The growing demand for sophisticated products such as perpetual swaps reflects the maturation of trading strategies where monitoring takes place. Effectively leveraging these tools is critical to promoting market health and creating sustainable revenue opportunities.
As we saw in 2024, hedge funds and family offices are diversifying beyond Bitcoin and Ether, with an increasing focus on stablecoins, derivatives, and emerging products. These players know that all markets have volatility and that trading comes with inherent risks. And cryptocurrencies are no exception. Rapid changes in the market can quickly turn a profitable position into a loss. Because derivatives generally derive their value from the underlying asset, they involve more inherent risks than spot markets due to factors such as leverage and complexity.
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