I recently spent 10 days in Crypto Asia , and, per this blog post, it dramatically changed my view of both crypto and the world. The bottom line is that the first killer app in crypto is speculation, and Asia is dominating in terms speculation and crypto trading.
Post the trip, as I delved deeper in to trading in Asia, it became obvious that crypto derivatives were driving the crypto market. So, on August 22nd, I held a conference call on crypto derivatives with three thought leaders, to put the moment in context, and to help us understand where the market is going:
Sam Bankman-Fried, Founder and CEO of FTX/Alameda Research — FTX is a new crypto derivatives exchange and Alameda Research is a seasoned market maker and liquidity provider that trades $1+billion daily
Joe McCann, Noted Crypto Trader & Founder of JoesCrypt — In addition to actively trading crypto, Joe shares his realtime trading thought his Telegram group JoesCrypt, which has 6,400+ followers and he’s building a set of proprietary trading indicators on CryptDex Pro.
Michael Kazley, Co-Founder and Head of Trading at Crescent Crypto — Crescent is a crypto native institution that does trade crypto assets, but focuses more on buying and holding.
You can listen to the hour long call below (you can start at the 4:20 mark):
Or you can save some time and read our six highlights from the call below:
1. Derivatives Are More Than 50% Of All Trading Volume In Crypto
You can see that when spot and derivatives volume is broken down by exchange, derivatives are larger than spot on the largest exchanges where both are offered:
2. Asia Dominates Volume In Crypto Trading
To date, Asia accounts for more than 75% of trading activity in 2019:
Within Asia, China is roughly 60% of Asian volume. Japan and Korea are second and third largest markets, each generating significant volume. and #3. After that, there’s a long tail of other Asian countries (e.g. Vietnam, Taiwan, and Indonesia), that trade a lot of crypto.
The most obvious reasons that there is such demand for crypto in Asia is that many Asian citizens don’t trust the currency in their home country and they have need to move money around the world. It’s also driven by Asian’s greater propensity to speculate (i.e. gamble).
3. There Are Only A Small Number of Derivatives Exchanges, And They Each Have Lots Of Problems
There are only five or six derivative exchanges because they’re so complex to build. Most notable are the requirements needed to control for risk and liquidity because of liquidations needed due to leverage.
We all know the hacks that happen at all exchanges, but derivative exchanges have other meaningful problems, like liquidity, that can cause poor risk controls and claw backs. In addition, the derivative exchanges suffer from kluge processes for simple things like managing collateral. Order times can often take more than a minute on derivative exchanges.
4. Liquidity Can Be Meaningfully Impacted By Industry Events
Given the importance of liquidity to a functioning derivatives market, it’s interesting to see the impact on liquidity that industry events can have.
For example, following news of the CFTC investigation of BitMEX, industry volume fell dramatically:
5. Determinism Is More Important Than Speed, Leading To Different Archetypes For Crypto Trading
While high frequency trading (HFT) took off in traditional markets in the late 90’s, Joe pointed out that it’s not an important factor in crypto trading for multiple reasons. The biggest difference is that there are so many exchanges, relative to regular markets where single exchanges usually dominate liquidity in given security instruments. In addition, the unique order types that give high frequency traders an edge, simply don’t exist in crypto today.
So if an investor is trading in size, and say, hitting the bid for $10M in bitcoin, they need to assess how deep is the order book? How deterministic is it that they get filled? What will the fills look like? Joe highlights that that’s more important than micro-second execution in HFT.
In fact, trading in crypto is so different than traditional market trading, that it requires a different set of talents. In the 90’s it was the rise of pattern trading that lead to machines being better than manual traders. Now there is a renaissance in trading due to a new type of trader that has pattern recognition burnt in to their brain from an early age. Crypto traders today are more accustomed to playing Fortnite and mapping that to crypto trading due to their pattern recognition skills.
Day trading in Asia is also entertainment. BitMEX has leaderboards. That would never exist in traditional trading. So Joe anticipates an increasing level of overlap between gaming and crypto trading as the market evolves.
6. It’s Early Days For Crypto Derivatives, So Expect More Innovative Products To Be Coming To A Derivative Exchanges Near You
In the traditional markets you see huge demand for products like Index Futures and ETFs. Those are obvious needs that will get filled over time (e.g. an ETF for mid-cap coins would have demand).
But in addition to porting over products like ETFs from traditional markets, there is massive white space for crypto native products. For example, ,“Hash Rate” futures would not only enable speculation in an area critical to crypto, they would enable miners to hedge their biggest risk. As a result, there’d be huge demand.
“Bitcoin Dominance” futures could enable investors to quickly de-risk portfolios that are heavily weighted to alt coins.
Given that the list of crypto native derivative products is only limited by our imagination, the future is bright, and its already shinning in Asia.
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The derivatives market in Asia is already the major driver in crypto today. And as the crypto derivative market matures, as the derivatives exchanges improve, and as new derivative products proliferate, the growth of derivatives, and the growth of trading in Asia, will blow people away.
Buckle your seat belts, it’s going to be quite a ride.
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