Crypto Spot vs Derivative Trading in 2020
With the evolution of cryptos over the years, the cryptocurrency market has entered the derivatives trading section. And volume has seen significant growth YoY. Initially, crypto futures exchanges went through several challenges with the regulatory systems. The exchange had to go over many checks before it was launched publicly.
In 2019, the already existing crypto future exchanges observed new records in trading volume with new products launching along the way. Further, the year 2020 continued to grow bigger in the crypto futures space.
Besides, the spot market did have a slow start but performed exceptionally well in the last quarter of 2020 – with bitcoin giving it a major boost. After fighting through resistance levels around $10,000, the Bitcoin spot market breached successfully and skyrocketed to about $30,000 by the end of 2020.
According to the Cryptocurrency Derivatives Exchange Industry Report released in November 2020 from Token Insight,
the crypto derivatives trading volume hit $2.7 trillion in Q3, by summing up data from 42 crypto exchanges.
To compare, the Q3 value represents an increase of 25.1% from the Q2 crypto derivatives trading volume. Also, the percentage increase from Q3 2019 stood at a whopping 159.4 percent. These numbers indeed depict the massive growth of the crypto market in the futures space.
Crypto Spot vs Derivative Trading – The Correlation
With unexpected numbers coming from the derivatives markets, the correlation coefficient between the spot market and the derivatives market was not in line with previous quarters.
In the first quarter of 2020, the correlation between spot and futures was 0.31, substantially lower than 0.76 in the previous quarter, Q4 2019. These figures imply that investors shift their focus to the derivative market and are relatively independent of the crypto spot.
Derivatives Market now represents ~55% of the Total Crypto Market
The rise of crypto derivative trading volume did not stop after the first two quarters. As per a report published by CryptoCompare in January 2021, the trading volume in the crypto derivative segment saw an increase by 8.6% in December reaching an all-time high to $1.43 trillion compared to $1.32 trillion in the previous month.
Furthermore, the crypto derivatives market now represents about 55% of the total crypto market. These consistent numbers indicate that sophisticated investors are keen on exploring the futures as they offer them the means to speculate on a market without having to actually buy it.
The Office of the Controller of the Currency (OCC) has shown estimates that banks presently have exposure to over $200 trillion in the entire national derivative market, indicating the importance banks have towards derivative products. And from the figures and stats above, there are great chances for crypto derivatives to contribute to the exposure.
We should also note the contribution of exchanges to the massive increase in the crypto derivatives trading adoption. One such notable exchange is Huobi.
In 2020, Huobi’s coin-margined futures trading, which includes 13 significant crypto assets showed a unilateral trading volume of $1.32 trillion dominating all the other crypto exchanges out there.
The below chart explains the market share changes among the top exchanges in the 2nd and 3rd quarter of 2020.
Why are crypto derivatives taking over spot trading?
The rise of crypto derivatives has been in tandem with the blossoming of the cryptocurrency market. Here are some of the main reasons why crypto derivatives are taking over spot trading.
Protection from volatility – From inception, cryptocurrencies have the reputation of being notoriously volatile. Crypto derivatives protect traders and investors from the volatility risks inherent in the crypto market, especially in bear runs. They allow investors to hedge against any potential losses that may arise from volatility.
Access to leverage – Derivatives allow traders to use leverage. In the spot market, if you have $1,000, you only get to buy cryptos worth $1000. The position you take is limited by the funds you have – the spot market tends to be limiting for small retail investors. With derivatives, you can take leveraged positions. For example, if you have $1000 and trade derivatives with leverage of 200X, it means you can open a position worth $200,000. This increases your profits significantly compared to trading in the spot market.
Derivatives allow trading in any market condition – Note that with derivatives, traders do not own the underlying cryptos, unlike in spot trading. Thus, crypto derivatives traders can speculate on the underlying cryptocurrencies’ price movements and go long or short as they please. This ensures that traders reap profits regardless of how the price will move.
Security against hacking – Hackers can gain access to your wallets and steal your cryptocurrencies. Some of the major crypto exchanges have been victims of such hacking. Investors in the spot markets have to incur extra charges to set up cold storages to secure their holdings. There is no risk of such losses with derivatives since you do not own any cryptocurrencies, but simply betting on trading the price fluctuations.
Case Study – Huobi making derivatives accessible for crypto traders across the world
Huobi was established in 2013 with headquarters in various financial hubs including Singapore, Australia, China, Indonesia, Russia, Argentina, Japan, South Korea, and Thailand.
Huobi exchange provides 340 tradable assets and has an average daily trading volume of $58.6 billion. The crypto derivative assets include futures, coin-margined swaps, USDT-margined swaps, and options. The assets available on Huobi include the mainstream cryptos such as BTC, ETH, LTC, etc., along with several other altcoins and stablecoins such as USDT and HUSD (Huobi’s stablecoin).
The Huobi platform is easy and simple to use, especially for novice crypto traders. The tradable crypto derivatives on this platform are also categorized as ‘favorites’ – which tracks your most traded derivatives, futures, coin-margined swaps, and USDT-margined swaps.
More so, the crypto derivatives are also categorized depending on the contracts, as shown in the snapshot below.
In the below snapshot, we can see the easy access of our currently open positions, orders, history, records, etc. This makes it easier in tracking our portfolio and trading performance.
Huobi also introduced lots of innovative features like locked margin mechanism, take-profit and stop-loss, real-time settlement, follow a Maker & Taker to reduce the trading cost and improve asset utilization for its users.
For example, the recently launched Daily Settlement function enables users to reap their rewards in advance without the wait until the settlement or deliver of their trades weekly. Also, the upgraded take-profit and stop-loss function allow users to set by profit rate. Therefore the spontaneous prediction of PnL makes users confident for the next move.
Talking about the latest innovation at Huobi, Ciara, VP of Huobi said ‘I talk to a lot of institutions all the time and listen to their feedback, needs, and that’s why we’ve always been putting a hundred percent of our energy to develop new products because they’ve been telling us about these needs. So as the results, we’ve been designed a lot of innovative functions to save users’ transaction time and costs.’
Below are some of the figures that portray the impact of Huobi in the crypto derivatives market:
How to easily trade crypto derivatives on Huobi exchange?
Huobi Registration – Opening an account with Huobi is simple and straight-forward. You only need to sign up with your email address – a process that takes less than two minutes. All you need to do is to visit their official website and click on the Sign-Up button.
While navigating through the Huobi trading platform is relatively easy, opening and closing trades are much easier. On the left side of the trading platform, you select your preferred asset class. The platform also gives you a wide array of technical, analytical tools including charts from TradingView and depth of market reports.
The simple illustration below explains some of the most significant markets and services offered by the Huobi exchange.
Why is Huobi Better than other derivatives crypto exchanges?
Although there are numerous features on the Huobi exchange that are much better than the other exchanges out there, fees and customer protection are the features that stand out.
Huobi Fees – Huobi trading fees are slightly lower than the industry average. These fees charged differ slightly depending on the class of crypto derivatives being traded. For common users, the ‘maker’ fees average at 0.02% while the ‘taker’ fees range from 0.04% – 0.05%.
Unlike competing platforms that require a trading volume of up to 250 BTC (~ $92.5 million) to get VIP status, Huobi only requires 25 million, which is much more friendly in this bull market. Achieving the highest level (VIP 7) will only require $0.5 billion worth of 30-day trading volume.
Huobi customer protection – Huobi has protected its customers with a strong cybersecurity defence system that significantly minimize risks of Dedicated Denial of Service (DDoS) attacks. Furthermore, Huobi has a security fund of 20,000 BTC for all of its users.
For each trading pair, there is a certain amount of insurance fund prepared. Besides, there are price limits, order limits, position limits and real-time monitoring to protect users from market manipulation. To protect users from unnecessary losses in a liquidation, Huobi designed a three-phase liquidation protection mechanism, and no transaction fees will be charged in partial liquidation. This is something we hardly see in any other popular crypto exchange.
We hope you find this article informative. In case of any queries, please let us know in the comments below. Cheers.
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