By Deribit COO Marius Jansen
Last week, CME announced it will launch regulated Bitcoin options starting from Q1 2020. The new product is currently under review by US regulators. However, given that CME has confirmed the news, the exchange must be reasonably confident it will get the go-ahead. The Chicago-based exchange has been successfully trading Bitcoin futures since the end of 2017, so this latest move represents an expansion of its existing cryptocurrency derivatives offering.
Futures are Bright
2019 is proving to be a boom year for crypto-derivatives. In March, CMEs competitor CboE pulled its regulated Bitcoin futures offering, leaving the former to corner the market. It went on to record all-time high trading in May. The retail markets have shown a similar trend, with BitMEX also reporting its highest-ever trading day in June, as Bitcoin hit $13,000.
However, until now, futures have dominated the crypto-derivative markets. BitMEX is the market leader, but it only offers perpetual swap contracts and futures. To date, Dutch exchange Deribit has been one of the only exceptions, offering European-style cash-settled options contracts against BTC and ETH. Currently, it holds around 95 percent market share of the cryptocurrency options market. This makes it the go-to exchange for advanced traders wanting to hedge their risks with different types of derivatives contracts.
So, perhaps CMEs foray into options is a cause for concern for Deribit? On the contrary, COO and co-founder Marius Jansen believes it demonstrates the strength of the markets, stating:
We are very pleased to see institutions like CME starting to offer options. We believe there is a very bright future for BTC and crypto options but, as of now, only the savviest traders trade them. Furthermore, CME's options launch indicates there’s ample liquidity in the futures markets. The entire ecosystem is naturally becoming more mature, resulting in more institutional interest.
Jansen’s point about market maturity echoes the overall sentiment of many in the industry. 2019 seems to be a tipping point for the cryptocurrency markets, with less volatility and an influx of institutional interest. This is also reflected in Bakkt’s recent and long-awaited launch of physically-settled BTC futures.
However, digging deeper, CMEs foray into bitcoin options isn’t likely to compete side-by-side with Deribit for various reasons.
Developing New Markets
US regulations impose restrictions on trading that originates overseas. These restrictions mean that although options trading through exchanges like Deribit is possible through intermediaries, it comes with some challenges. Therefore, it’s likely that CME will be able to capture participants in the US options markets who would previously have been put off by these challenges.
Furthermore, there are some fundamental differences between the types of options contracts on offer between Deribit and the CME. Deribit offers cash-settled options where the underlying asset is the cryptocurrency (BTC or ETH) itself.
In contrast, the CME is offering a different type of derivative, called options on futures contracts. Here, the underlying is a futures contract for BTC, not BTC itself. Options on futures contracts are a more complex product, as a derivative of a derivative. Trading involves keeping track of more variables. Therefore, CME is essentially offering a new product to institutional investors, which again points to creating new markets rather than snatching a share of existing traders.
All this considered, it’s clear why Deribit’s CEO is unperturbed by CMEs new venture. Given the current challenges for US institutions in buying cryptocurrency options, it’s unlikely that Deribit relies on these users for a significant proportion of its revenue. Furthermore, the CME isn’t going to attract retail options traders, or institutions looking to trade options contracts based on the underlying asset itself rather than a futures contract.
Overall, the outlook is sunny for anyone interested in BTC. For institutions, CMEs entry provides a greater range of financial instruments with which to trade, offering more opportunities to hedge the risks of trading bitcoin in the spot markets. More trading means more liquidity, which is good news for all market participants.