Kraken Releases ‘The Tail Wags the Dog: An Evolution of Bitcoin Futures’

$6 billion in 2017. $1.7 trillion today.

Volume has exploded in the cryptocurrency futures market since the launch of leveraged trading contracts on major venues just three years ago. In fact, derivatives volumes are now commonly 4.6x the size of spot volumes. 

The reason for this explosive growth? One likely candidate was the dramatic 90% drop in crypto volatility during 2018. With some futures venues offering leverage up to 125x, traders with an appetite for risk have pivoted focus and increased their exposure to these tools.

But while futures offer opportunities for some market participants, they bring new considerations for traders and exchange operators. 

In our latest report entitled “The Tail Wags the Dog: An Evolution of Bitcoin Futures,” Kraken Intelligence takes an up-close look at how the push-pull relationship between the futures and spot markets can intensify short-term volatility, and why changes in market structure may be needed to bring the market into harmony.

We cover:

  • The Rise of Crypto Derivatives – We trace the history of futures trading from early 2017, when volumes were a fraction of spot markets, to its current dominance, and provide detailed data comparing futures to spot markets over the last few years.
  • Black Thursday – On March 12, Bitcoin’s saw one of its worst crashes since Mt. Gox collapsed, with its price dropping nearly 50% on the day. We explore the extent to which the decline may have been exacerbated by the futures market, as open interest in futures was decimated and liquidity dried up across the spot exchanges.
  • What’s Next? – What are the ramifications of this new market structure? What policies or mechanisms have futures venues already adopted and how might these impact traders? We conclude by examining the possibilities for the continued evolution of crypto futures markets, and explain what we think is the most likely scenario.

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