In a bid to breathe new life into its market for crypto derivatives, Hong Kong-based CoinFLEX is relaunching its platform and focusing on what it says will bring a digital asset twist to the repo market.
Launched in 2019, CoinFLEX first emerged as a marketplace for physically-delivered futures. Despite some initial success, the firm has failed to outcompete larger rivals in the derivatives market in terms of notional trading volumes. The relaunch puts a new product at the center of its market: The CoinFLEX Repo Market. It's also adding spot and perpetual contracts to its market.
In a sense, the new product borrows a leaf from the book of the traditional banking space's "repo market." Operating in the background of the financial system, the repo market facilitates a type of borrowing between large financial institutions. Essentially, large clearing banks sit between other banks and investors, allowing them to exchange assets (namely cash and safe securities) for a short period of time — typically less than 24-hours. The quick cash infusion offers banks a cheap way to finance trades or other business activity.
Indeed, such a market exists in crypto, but on a much smaller scale, with about $5 to $50 million worth of such transactions occurring per day, one industry executive estimated. Still, the market is fragmented and most of the deals are done on a bilateral basis, rather than through a clearing party that sits in between two entities.
As for CoinFLEX, its revamped platform could bring more participants to the repo market, allowing a large institution like a miner or broker to simultaneously swap a position in perpetual swaps for bitcoin. On the other side of that trade could be a number of other types of market participants, including retail or day-trading clients.
"So when user A buys repo, they are buying 1 BTC (spot) and selling 1 BTC (perp) simultaneously, at some % difference price (could be 0% or 0.01% or -0.01%)," CoinFLEX chief Mark Lamb explained. "The benefit of this is that it's not a complex deal that has to be negotiated, buyers and sellers do not have to 'settle' anything after the trade, it's a trade they do within CoinFLEX and the result of the trade is they get immediate changes to their spot balances and perp positions."
Those transactions, as in the traditional repo market, can reverse the next day. Large brokers or investors benefit from being able to quickly move out of their perpetual position to take advantage of other trading opportunities, including the ability to borrow quickly against their crypto assets, according to Lamb. As for the retail traders, they benefit from earning a yield.
The transition comes after a relatively difficult period for CoinFLEX — at least from a volumes perspective. Since the end of 2019, trading volumes in its physically delivered futures contract have dropped precipitously. The firm saw a big boost last summer following the rollout of a market maker incentive program. Indeed, in the fall of 2019, CoinFLEX trounced rivals ranging from Bitfinex to FTX to Intercontinental Exchange's Bakkt.
Market insiders noted that CoinFLEX's approach worked inasmuch as it attracted liquidity providers, but it failed to attract users from other marketplaces.
"When the incentives stop, traders leave," one trading executive noted. "There needs to be something keeping you at the platform."
Still, Lamb is betting that the new repo market will do the trick. That's because the revamped offering brings a myriad of products together, allowing traders to more seamlessly move between them rather than operating across an array of venues.
"You do not even need to wait until daily settlement of the perp, if you urgently wish to convert — you can trade in the repo orderbook. As a result it ties our perpetual contract more to the spot world and allows [over-the-counter trading] firms to use our perp as a more effective hedge. Right now many OTC firms will hedge in BitMEX/etc perps if a client buys BTC from the OTC firm. Then they will sell the long BTC Perp hedge and buy spot BTC, converting the perp into a spot position."
Such a process is expensive from a fee perspective and takes a lot of time, according to Lamb. On CoinFLEX, an OTC desk could buy a perpetual swap on the venue as a hedge whilst purchasing a repo to convert the position to spot.
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