MAD CRYPTO: Bitcoin derivatives markets have gone quiet and here's a possible reason why

By Frank Chaparro

Read the non-AMP story on Theblock.co

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Quick Take

Mad Crypto is making a comeback
In this edition, The Block’s director of news Frank Chaparro takes a look at the crypto derivatives market
Volumes have come down as global markets whipsaw in response to coronavirus
It’s not exactly clear what’s behind the volume decline, but here is one guess.

This column appeared in The Block's Genesis newsletter on Wednesday.

The bitcoin derivatives market is something we enjoy watching at The Block, for several reasons.

The fun charts from Skew make the information digestible, and, of course, there is some enjoyment in watching the horse race between exchanges as they vie for supremacy.

Still, the market data (which spans volume, market dominance, breakdown of puts and calls for options) serves a practical purpose as well, offering an indication of market strength, investor anxiety, and even bitcoin's future price. Earlier this year, all eyes were on the derivatives market as volumes for several products spiked.

But a lot can change in a few days. Volume trading for cryptocurrency futures and options have collapsed over the course of the last week. That's happened as anxiety and fear over the economic impact of the coronavirus has gripped global markets. Indeed, daily aggregated volumes for bitcoin futures has halved since February 26, from over $20 billion to $10.9 billion.

Bakkt, which rolled out its bitcoin futures product in September 2019, has seen open-interest for its product fall from $19 million in February to $16 million on Tuesday's trade. Rival CME Group witnessed a similar fall from $338 million to $212 million over the same period. Here's a chart:

In options — which is dominated by Deribit — volumes have fallen from over $150 million on February 26 to under $40.7 million.

So, what gives? In U.S. equities, options trading has increased as investors look to hedge the risk in their underlying portfolios. As noted by the Wall Street Journal:

"Options trading has swelled, particularly as investors have gotten more creative in their search for higher returns during a period of ultralow bond yields. The activity can help suppress market swings, keeping stocks calm for extended periods."

The activity we are seeing in bitcoin derivatives relative to U.S. equities could mean investors are feeling sanguine about the digital asset market. Over the past week, as volatility surged in global markets, bitcoin has traded in a relatively tight range, between ~$8,400 and ~$8,900 a coin. As such, volatility has been relatively muted, but not super muted:

Admittedly, it is a short time period to look at and is subject to change, but it is striking considering the market backdrop.

There is one other possibility: Market participants that trade Bitcoin are in it for multiple reasons such as the 24/7/365 market and unregulated nature but, arguably, the main one is volatility. And they are currently getting their fix from trading equities. That goes for both options and futures.

If this theory is right, the volumes should return when the equity markets stabilize. I will be watching.