In Q1 2020, the traditional stock markets were crashing like there was no bottom. On the contrary, the cryptocurrency derivatives exchange trading volume was soaring. The crypto derivatives exchanges witnessed a 314% increase in trade volumes as compared to an average of all the four quarters of 2019. According to TokenInsight’s Q1 2020 cryptocurrency derivatives exchange industry report, the highest daily trade volume on crypto derivative exchanges touched $62.5 billion.
Why did this happen?
Derivatives have proven to be efficient trading instruments in the traditional markets. This is because they help traders manage the risk and multiply profits. As the crypto markets continue to be volatile, the crypto traders are looking for platforms where they can make profits by minimizing risk and maximizing rewards. The derivatives exchange operators offer traders a platform where they can gain exposure to cryptocurrency in a capital-efficient way.
What attracts traders to crypto derivatives exchange?
During the Q1 of 2020, the average daily trading volume of the crypto derivatives market was $ 23.3 billion. This was a 274% increase over 2019. The point is why crypto traders swarmed to buy crypto derivative products. Here are a few reasons:
For a trader to open a long position in the spot market for let’s assume 1 bitcoin, he has to pay the full 1 bitcoin before he places the trade. However, on a derivatives exchange, a trader can leverage his capital position more than 100 times. Thus, even if he does not have full capital, he can maximize his profits.
- Hedge the risk
A derivatives trader can hedge the risk for a minimal cost using a crypto derivatives exchange. It is a very vital benefit that attracted huge trading volumes to the crypto derivatives exchanges.
A year back, a couple of leading crypto derivative exchanges were handling the entire volume. However, the market is shaking its position and market participants are looking for more versatile exchanges with more features. Derivatives exchange operators are leveraging derivatives exchange development services to build platforms that can meet the end-users needs. Firstly, it is important to understand what the traders are actually looking for:
Types of contracts available
Crypto derivates are primarily of four types. These are Futures, Options, Perpetual Contracts, and Swap. Most of the leading exchanges offer only Futures or Perpetual Contracts to their end-users. Not many exchanges offer Options and the market is still in the early stages of development. Thus, an exchange offering different types of derivatives products is desired by the traders.
- Collateral Deposits
Most of the leading derivatives exchange development services build platforms that accept Bitcoin as collateral deposits. Very few of the exchanges support stablecoins like USDT or altcoins like Ethererum to be deposited as collateral. With this flexibility missing in the space mostly Bitcoin maximalists are able to trade crypto derivatives. By supporting multiple altcoins or stablecoins, a new derivatives exchange can attract traders.
- Variety of trading pairs and deep liquidity
The leading exchanges provide limited trading pairs. For example, BitMEX has only three trading pairs against the USD (BTC, ETH, and XRP). In case an exchange provides a variety of contract trading pairs, they suffer from illiquidity against the BTC contracts.
- Manage System overloads
The trading volumes for some of the leading exchanges have been shaking for some time now. This is because these derivatives exchanges fail to manage system overload during peak volatility. They have suffered flash crashes and mass liquidation. The crypto users are looking for platforms that can manage the overloads well.
- Spot and derivatives switch
This is an interesting feature and can help an exchange attract both spot and derivatives traders. You may seek crypto derivatives exchange development services that can help you build a seamless spot and derivative switching experience. This will be a perfect platform for traders who desire to hedge their spot positions with futures.