As Crypto Derivatives Market Grows, Analysts Asses Their Impact On Prices

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The market for crypto derivatives – such as trading perpetual futures and options contracts-has grown strongly in recent years. But is this a healthy development for the cryptoasset space and is there cause for concern?

The prevalence of crypto derivatives has once again come to the fore after a market correction this month. It was quickly blamed on overleveraged derivatives traders, given the massive amount of liquidations seen in a matter of hours.

Among the many in the community who raised the issue was the popular Bitcoin (BTC) on-chain analyst Willy Woo, who felt that the correction was “caused by deleveraging.He added that just like during the COVID crash”derivatives overreacted “and the market appeared” cheap ” after the sell-off.

But Willy Woo is not the only one who has raised the issue of derivatives in crypto markets over the years.

For a comment on how industry insiders see the spread of futures and options in the crypto market, Luuk Strijers, chief commercial officer (CCO) on the derivatives exchange Deribit, said *

* that while spot market activity remains “very important to determine the direction of a movement,” activity in the derivatives market “often determines the size” of the movement.

“Leverage and use of derivatives as a whole reinforce movements in the underlying,” Strijers said, noting that “this affects both directions,” as seen during the market correction in September.

“Such a fall or correction will lead to liquidations, which will again strengthen the downward movement and cause a cascade effect,” the CCO added.

And while it seems plausible that derivatives can often amplify price movements in the spot market, some analysts also claim that they can actually determine market trends.

“Derivatives with high volumes often dictate market trends,” said Hunain Naseer, senior analyst at OKEx Insights, suggesting that derivatives traders with deep pockets can actually move markets.

However, the analyst added that spot trading on a large scale “obviously” can also have an impact and that ultimately it is “a feedback loop” between spot and derivatives that drives market prices.

With their aura of complexity and sophistication, derivatives are a part of the market that triggers the feelings of some of the staunchest defenders of BTC and crypto. And since BTC’s original ethos is” uncensored money “and” not your keys, not your Bitcoin” it makes sense that the proliferation of derivatives in the crypto market is arousing suspicion.

For example, a common accusation among another group of unorthodox investors, namely gold and silver bugs, is that the “paper markets” for precious metals artificially manipulate the price of the physical metal. “Unlimited” amounts of futures contracts can be produced, they say, even though the supply of physical metal is scarce, which should supposedly justify higher prices.

And although futures contracts exist in unlimited quantities, while the underlying asset does not,this concept is not exclusively for precious metals markets. In fact, all commodity markets act in the same way, with only a tiny fraction of market participants actually intending to physically deliver the goods.

Not surprisingly, the notion that derivatives manipulate the prices of underlying assets has resonated with parts of the crypto community.

For example, observers have pointed out that the Bitcoin price peaked in 2017 on the same day that the Chicago Mercantile Exchange (CME) listed the first regulated futures contracts based on the cryptocurrency, which even the San Francisco Federal Reserve said in a research article “does not seem to be a coincidence.”

However, for Bitcoin and other cryptoassets, the situation is still different in that it is a new asset class, in which until relatively recently there was only one” physical ” spot market. Market participants must therefore wait and see how the two segments of the crypto market will develop and ultimately coexist with each other.