Genesis Report: Crypto Derivatives Emerge as the Next Key Growth Driver in 2023

According to the , crypto derivatives is set to experience substantial expansion, fueled by a massive decrease in spot market liquidity and a notable trend towards utilizing derivative instruments.

“With spot market liquidity suffering and spot order book depth chronically flagging, it has become increasingly apparent that a significant portion of the future growth of crypto volumes will be in derivatives,” Genesis said.

In Q2, despite the BTC price ranging between $27,000 and $30,000, 20 crypto exchanges generated $1.67 trillion in – a 36% decrease from the previous quarter. 

This decline highlights reduced crypto market liquidity, prompting the introduction of various to address the issue.

The market drop can be attributed to several key factors, primarily the Bitcoin exchange-traded fund (ETF) filing and the significant role played by the Securities and Exchange Commission (SEC) in influencing market dynamics. 

The decline began with Bittrex, which faced allegations of trading activities involving unregistered securities. This accusation notably impacted spot trading, showing a substantial decrease in activity on the Bittrex platform.

Subsequently, the focus of the SEC’s regulatory scrutiny shifted to other significant players in the market, including Binance US, Binance, and Coinbase. 

These exchanges were accused of offering unregistered securities, further exacerbating the decline in spot trading activity. Spot trading volumes hit their lowest point since 2020, according to data from .

The consequences of the SEC’s actions extended beyond spot trading. The crackdown on these exchanges resulted in a significant loss of liquidity for the top 10 tokens. 

Notably, Bittrex saw a substantial liquidity drop of around 68%. In comparison, both Binance US and OKCoin experienced a staggering 85% decrease in liquidity, and other major platforms like Coinbase, Kraken, OKX, and Huobi witnessed spot trading volumes plummet by over 50% during the second quarter.

Expanding Crypto Derivatives Market: Driving Institutional Adoption Amidst Regulatory Uncertainty

The Genesis report highlights that, due to a substantial decrease in spot market liquidity, market participants actively seek alternative avenues for crypto trading without clear US regulations. It emphasizes the potential of a strong crypto derivatives market to amplify global institutional adoption significantly.

As established financial institutions continue to enter the cryptocurrency sector in Q2, which signals a broader shift towards acceptance and credibility, Genesis reports that the crypto derivatives market could expand by tenfold its current size.

“As a corollary, the notional volume of equity options in the US exceeded the notional traded value of the underlying equities in 2021 for the first time,” the report reads. “If following this TradFi trend, the crypto options market has room to grow 10-fold from current levels.”

In the report, the firm emphasized key developments in Q2 2023 within the crypto derivatives space. Notably, Deribit, an options exchange, set a new record by trading the highest number of option contracts within 24 hours this year. 

This accomplishment aligned with , underscoring the strong connection between price movements and derivatives activity.

Additionally, Genesis spotlighted introduction of institutional-sized fixed-date and perpetual futures in June. 

The report also highlighted a substantial uptick in derivatives volumes at the Chicago Mercantile Exchange (CME), which surged by nearly 25% in July, reaching approximately $1 billion.

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