Starting from the bitcoin derivatives market： 9 wins and 1 loses or loses the whole game, wandering in the gray area.
Since the end of October, 2020, the price fluctuation of Bitcoin has been increasing at the same time, and some investors have also poured into the bitcoin derivatives market.
On January 21st, the price of Bitcoin once fell below $32,000, which was 10.3% lower than the highest price in 24 hours. Previously, on January 11th, the price of Bitcoin once dropped by 27.78% from the highest price of $41,962, and on January 4th, it once dropped from more than $34,000 to around $28,000 in one day.
Among many influencing factors, some analysts believe that the sharp fluctuation of bitcoin price is behind the growing derivatives market.
Researchers at Skew.com, a cryptocurrency data analysis platform, recently wrote on Twitter: "The open contracts of Bitcoin futures are rapidly rebounding to a record high." According to the chart provided by it, since the end of October 2020, the open contracts of bitcoin futures have been on the rise.
Since late October, the growth trend of open positions in bitcoin futures of various exchanges has come from Skew.com, where bitcoin derivatives transactions occupy a larger market turnover than spot transactions. According to The Paper’s understanding, in addition to spot trading, Bitcoin currently has leveraged trading, as well as derivatives trading such as futures contracts and option contracts. Among them, leveraged trading is also based on spot trading, so some insiders and exchanges do not regard it as cryptocurrency derivatives. However, this kind of transaction is also different from spot trading, which can be understood as the product type derived from spot trading and can achieve the effect that derivatives can achieve.Leveraged transaction: leverage ratio is 2-10 timesTo provide investors with short-selling opportunities.
Leveraged trading is a way for investors to trade assets with funds provided by third parties. In traditional financial markets, such as the stock market, leveraged trading is also called margin trading. Investors can borrow money from stock brokers to buy stocks or borrow stocks to sell them. In the cryptocurrency market, borrowed funds or cryptocurrency assets are usually provided by other users in the exchange.
Leveraged trading can be divided into long and short trading.
Take Bitcoin as an example. If investors expect the price of Bitcoin to rise, they need to borrow more stable coins in their hands to buy Bitcoin, and then sell them to earn the difference after the actual increase. For example, investors have 2000USDT (TEDA coin, a stable currency linked to the US dollar), which can be used as a security deposit. They can borrow 10000USDT with five times leverage, then buy bitcoin, sell it after the price of bitcoin rises, and return 10000 USD T. After that, the investor’s profit is five times that of buying and selling 2000USDT in bitcoin. Bears, on the other hand, if investors expect bitcoin prices to fall, borrow bitcoin and sell it immediately and buy it back after the market falls.
However, once the investor’s opening direction is opposite to the market trend and the market fluctuation exceeds a certain proportion, and the total assets of the user’s margin account are lower than the minimum margin requirement for leveraged trading, the exchange will force the sale of the assets mortgaged by the user to close the position, that is, "explode the position". For example, a bull with 5 times leverage, once the price of Bitcoin falls by more than 20%, multiplied by leverage is 100%, and the margin will be forced to close.
"Even less than 20% will pay off the debt, because leveraged trading has interest." A cryptocurrency market insider told the The Paper reporter.
Compared with conventional spot trading, leveraged trading means that investors can get more funds to amplify the trading results, so as to get more profits. Moreover, spot trading can only buy low and sell high, while leveraged trading provides investors with short-selling opportunities. At present, the leverage ratio of leveraged transactions in the market is generally 2-10 times.
"Leveraged trading actually allows some large holders of money to hedge against the foreseeable price drop without selling money," said an insider in the cryptocurrency market. "Constant arbitrage can meet the needs of long-term holders of money."
For example, he said, if a big money holder holding 1,000 bitcoins thinks that the price of bitcoin will drop by 5 points in the short term, and if it doesn’t move, there will be losses, so he can use 200 bitcoins as a margin to open five times of leveraged trading short, borrow 1,000 bitcoins to sell, and then buy them back after the price drops. In this way, it can make up for the losses caused by the price drop of the remaining 800 bitcoins.
Futures contract: the maximum leverage can reach 125 times.
In the traditional financial market, futures contracts are standardized contracts formulated by futures exchanges, which make uniform provisions on the expiration date of contracts and the types, quantity and quality of assets bought and sold. On this basis, the futures contracts in the cryptocurrency market have made some innovations. At present, they are divided into delivery contracts and perpetual contracts.
In the delivery contract, investors can judge the rise and fall, and choose to buy long contracts or sell short contracts to gain the gains from the rise or fall of cryptocurrency prices. The delivery contract of mainstream cryptocurrency exchanges generally adopts the mode of spread delivery, and the exchange will close all the open contract orders when the contract expires. At present, the delivery time of the delivery contract is the current week, the next week, the current season, the second quarter and so on.
The perpetual contract is an innovative derivative, similar to the delivery contract, except that the perpetual contract has no delivery date, and users can hold it all the time and close their positions independently. Therefore, the perpetual contract relatively lowers the professional investment threshold, and investors don’t need to consider the steps such as delivery and warehouse change, which is similar to the spot experience.
"A particularly big drawback of the perpetual contract is that the rate is settled three times a day and once every eight hours. If the amount of funds is huge, it will take a few ten thousandths of a day, and the number will be huge for one month in a row." The above cryptocurrency market insiders said.
In order to ensure the long-term convergence between the perpetual contract price and the spot target price, the exchange basically uses the capital rate method. The fund rate refers to the settlement of funds between all bulls and bears in the market. If the rate is positive, the bulls pay the funds to the bears. If it is negative, the short pays the long position. In this way, the demand of buyers and sellers for perpetual contracts is balanced, and the price of perpetual contracts is basically consistent with the price of the underlying assets.
Compared with leveraged trading, both delivery contracts and perpetual contracts are bullish and bearish, and leverage can also be used with margin at the bottom. However, leveraged trading like Bitcoin is to borrow a third party’s stable currency to do long or borrow bitcoin to short. Futures contracts are not the concept of "borrowing", but the long investors and short investors bet on each other, and the exchange plays an intermediary role in matching.
"Compared with pure spot leveraged trading, the utilization rate of funds is stronger." The above cryptocurrency market insiders said.
According to the above-mentioned cryptocurrency market insiders, if you make long futures contracts, as long as the leverage is low enough, and then use enough margin according to the self-considered bitcoin price limit, then as long as the market finally picks up, you will eventually make money.
"The contract also has its value. For those who really have a sense of risk control, the contract is a means to improve the utilization rate of funds, not as terrible as imagined." He said.
Futures contracts are the most traded derivatives at present. Compared with leveraged trading, the highest leverage of perpetual contracts and delivery contracts in mainstream exchanges can reach 125 times.
Option contract: At present, it accounts for about 1% of futures.
Option contract is a transaction of buying and selling rights, which stipulates the right to buy and sell a certain kind and quantity of primary assets at a certain time and at a certain price, and can be divided into call option and put option. In the cryptocurrency derivatives market, the trading logic of T-type quoted option contracts dominated by Deribit exchange is almost the same as that of option contracts in the traditional financial industry. All of them are European options, which can only be exercised on the expiration date. Investors can act as option buyers or options sellers.
The simple version of the new options (also known as short-term options) introduced by the currency security and other exchanges is simpler and faster. Investors only need to choose the expiration time and purchase quantity of options when purchasing options, and the exercise price changes in real time when placing an order, which is provided by the exchange. According to the product characteristics of different exchanges, it can be divided into European options and American options. Compared with traditional options, its maturity range is shorter, ranging from 5 minutes to 1 day. Investors can only play the game of option contract with the exchange as the buyer of option.
However, the disadvantage of the option contract is that the intrinsic value is not transparent enough, and the risk that investors need to bear as the counterparty of the option in the exchange is high, even if the price of the option is unreasonable, they cannot learn from it.
The above-mentioned cryptocurrency market insiders said that institutions, qualified investors, Hong Kong and the mining circle will recognize options more, "sometimes it is to hedge some ups and downs of the spot".
"For example, if I think Bitcoin may go up next, I will buy a 50% call option and then a 50% put option," he said. "In the middle, I think that after the trend is formed, I can stop the other one, so I won’t lose money, and I will always keep it."
Therefore, compared with other derivatives, there is no problem of short position in option contracts.
Gu Yanxi, the founder of American Liyan Consulting Co., Ltd. and a researcher in the blockchain and encrypted digital assets industry, told The Paper that compared with futures, the risk of options is smaller, because there are many options tools, and the biggest loss is only royalties, instead of collecting deposits on both sides like futures. As long as the position is in the opposite direction to the market direction, the margin will be collected or even closed if it exceeds the limit.
The above-mentioned cryptocurrency market insiders said that in the cryptocurrency market, options have not been fully developed, and now they are at a stage that has just started, accounting for about 1% of futures.
"Option contracts will gradually enter more and more professional traders, including with the obvious trend of institutionalization. After coming in, many institutional investors may be willing to choose some option tools that they are more familiar with to achieve price anchoring, or according to the logic of their long-term rise or fall. Therefore, more gameplay such as options or binary options may be developed." The industry insider said.
In addition to the above three products, the cryptocurrency market also has the transaction of leveraged tokens. In essence, it is a token with leverage function, which can provide the reward of multiple leverage of the underlying assets, and its function is similar to that of ETF(ExchangeTradedFund) in the traditional financial field.
Leveraged tokens do not need collateral and maintenance margin, nor do they need to worry about the risk of liquidation. Behind each leveraged token, there is a basket of subject matter positions. According to different products, the real target leverage ratio behind leveraged tokens is different. Leveraged tokens maintain the target leverage by increasing or decreasing the positions held by the underlying assets through the position adjustment mechanism of the exchange.
Risk: Without risk control, all bets are off if you win 9 and lose 1.
The high leverage ratio of derivatives not only brings high returns, but also means that the risk of short positions is higher in the market with sharp fluctuations, especially for futures contracts with the highest market share at present.
The above-mentioned cryptocurrency market insiders said: "For white users or newcomers who have just entered the market, this may be something that has entered the grave, especially those with strong gambling. If you open a futures contract of 100 times, if there is not enough margin, as long as it fluctuates up and down by 1%, it will die."
"You won nine times, but in the process of a plunge and a surge, you went in the wrong direction and everything was gone. As long as you don’t do a good job of risk control, you don’t know how to add margin, you don’t know how to divide the warehouse, how much money you earn, and the mental state of being unable to sleep will be very tormenting. " He said.
In addition to the investment risks of derivatives, Gu Yanxi believes that in the cryptocurrency market, there are also many risks for investors in non-compliant derivatives exchanges, such as internal operational risks, bankruptcy risks, and running risks.
"If the internal management process is not good, the storage place is stolen, or it is a security mechanism, and the private key of the cold wallet is not firmly stored, resulting in the partial loss or overall loss of the key. For example, a centralized exchange can rewrite its own books at will, and it can fill in unlimited positions, but users don’t know. " He said.
Due to the high volatility of cryptocurrency assets, it often leads to violent fluctuations in many derivatives markets such as leveraged transactions and contracts. The processing capacity of the exchange’s trading system is particularly critical. If users can’t close positions and add positions in time, it may cause huge financial losses. In addition, due to the opacity of derivatives trading, small derivatives exchanges may have evil behavior, which seriously damages the interests of investors.
Cryptographic currency derivatives exchange is in urgent need of compliance
Compliance of cryptocurrency derivatives exchange is imminent.
At the end of 2017, Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) launched bitcoin futures contracts; During the same period, LedgerX launched the first physical settlement bitcoin futures contract in the United States. In 2019, Bakkt also launched bitcoin futures and options contracts, which is the first bitcoin option derivative approved by the US Commodity Futures Trading Commission (CFTC).
In the current cryptocurrency market, only these four local exchanges in the United States are approved by the regulatory authorities and operate derivatives transactions in compliance. In terms of policy, the regulatory policies of cryptocurrencies in various countries are still vague.
Gu Yanxi told the The Paper reporter: "At present, the trading volume of these exchanges is relatively large, and they are all registered in some small places and operated in different places, such as Seychelles or the Bahamas. The specific personnel may be in Singapore and Hong Kong, because there is no strict requirement for supervision in the local operation. But now Singapore and Hong Kong will also start to supervise, and they will definitely apply for a license in the future, just like the mainstream derivatives exchanges. If there is this requirement, the transaction volume will definitely be hit very hard. "
Gu Yanxi also pointed out that at present, all exchanges use USDT as the main trading medium, but it is also a non-compliant dollar stable currency. Once the US government sues USDT and takes regulatory measures against it, the traffic in the derivatives market will also lose a lot, so it will be very risky.
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