Understanding The Crypto Derivative Market: New Assets, Old Rails
Originally published in Forbes CryptoAsset & Blockchain Advisor, April 2020
In September 2015, bitcoin became the world’s first digitally native commodity when it was officially designated as a tradeable commodity by the Commodity Futures Trading Commission (CFTC). In the U.S., there’s still not an easy way to invest in bitcoin through an exchange-traded fund product, but we have futures-based products that reward the trader, not the investor. Let’s look back at this radical shift in designation to see how the CFTC paved the way for the financialization of crypto derivatives like bitcoin futures.
What Are Crypto Derivatives?
In the same way that traditional derivative products derive value from an underlying asset, crypto derivatives derive their value from underlying crypto assets like bitcoin. However, unlike traditional commodities like gold and oil, bitcoin is digitally native. This means that it does not need to first exist as a physical commodity like bricks of gold or barrels of oil in order to be digitized and traded online.
Digital nativity makes pricing the exchange of crypto assets unique because price discovery is relatively new and inherently decentralized. Without a standardized consensus on crypto asset valuation, prices vary by demand…
