Crypto Derivatives: State of the Market - Commissioned by FalconX

Executive Summary 

This report provides key insights into the state of the crypto derivatives market. Section 1 starts by highlighting the increasing  inflow  of  institutional  capital  into  the  crypto  space.  It then outlines the main crypto derivative  products and their  differences to those in the traditional finance space.

Section 2 takes stock of the state and recent developments in the crypto derivatives market by looking at the four key metrics i) volume, ii) open interest, iii) funding rates, and iv) implied volatility. It provides several insights:

• Both volume and open interest metrics indicate that the crypto derivatives market has grown considerably; 
  
• Activity in crypto options relative to futures is set to grow strongly if ratios of options to  futures  for  (i)  open  interest  and  (ii)  volume  converge  to  those  found  in  the traditional finance space;
  
• Activity  on  the  crypto  derivatives  market  continues  to  exceed  that  on  spot  markets, indicating some degree of market maturation; 
  
• Implied volatility is still relatively high in comparison to equity markets, but continues to trend downwards, and funding rates have been compressed.  

Section  3  sheds  light  on  the  major  derivative  trading  venues,  which  are  providing  the infrastructure  that  makes  possible  the  strong  growth  in  the  crypto derivatives  space.  It is shown  that  most  crypto  derivative  venues  are  of  a  centralized  crypto-native  nature.  In addition,  it  is  discussed  how  liquidity  network  service  providers  give  investors  access  to aggregated liquidity from crypto exchanges and OTC venues to address liquidity fragmentation. This aggregation may result in better liquidity, transparency, and pricing. 

Section 4 concludes and provides an outlook on future growth and developments in case there is further regulatory scrutiny.