A new avenue has opened up for retail investors in the United States to engage in cryptocurrency derivatives trading, igniting optimism among crypto analysts who see potential for market revitalization.
The launchpad for this fresh opportunity is none other than Coinbase (NASDAQ:COIN) Global, a prominent cryptocurrency exchange. On August 16th, Coinbase achieved a significant milestone by becoming the first crypto-focused company to secure approval for offering cryptocurrency futures to U.S. retail clients.
While it’s still early days, the cryptocurrency markets are abuzz with speculation about the impact of this development. There’s hope that the entry of a regulated and listed crypto firm into the U.S. retail futures trading sector could breathe new life into the cryptocurrency derivatives market, which has seen a contraction in recent times.
Lucas Kiely, Chief Investment Officer of digital investment platform Yield App, remarked, “Coinbase’s approval to offer U.S. futures has the potential to rekindle hope and momentum in the market.”
In a crypto landscape that has faced challenges including sluggish bitcoin performance and uncertainties associated with global central banks, the allure of volatile crypto assets has diminished. However, Coinbase’s announcement arrives at a juncture where the derivatives trading sector has witnessed diminishing volumes due to economic uncertainties, regulatory hurdles, and a climate of low volatility that has led investors to exhibit caution.
In the United States, retail traders can directly trade bitcoin on licensed exchanges like Bitstamp and Coinbase. While options trading on the CME is available, it requires the involvement of a broker. Alternatively, retail investors can invest in bitcoin exchange-traded funds (ETFs) issued by entities such as ProShares and VanEck.
Coinbase’s introduction of cryptocurrency futures trading has garnered significant attention due to the potential influence of retail traders known for their fervent meme-stock trading activities fueled by platforms like Reddit. This influx of retail interest could potentially reshape the dynamics of the cryptocurrency realm.
Todd Groth, Head of Index Research at CoinDesk Indices, emphasized that it’s too early to ascertain the full extent of the launch’s impact. “It remains to be seen how Coinbase structures these products,” he stated.
DERIVATIVES’ DIMINISHING DOMINANCE
Derivatives like options and futures have been integral to cryptocurrency trading since their emergence around 2014. These instruments allowed investors to speculate on bitcoin price movements with limited capital outlay. Institutional investors have also been drawn to derivatives, with the number of Large Open Interest Holders in CME bitcoin futures increasing by 5% since Q2, as per exchange data.
However, July witnessed a decline of nearly 13% in derivatives trading volumes, amounting to $1.85 trillion, marking the lowest monthly volume since December 2022, according to CCData, a research firm. Despite this, derivatives still constituted a significant portion of cryptocurrency trading volume on centralized exchanges, comprising 78.2% of the total in July.
While spot cryptocurrency trading volumes also dipped by 10.5% to $515 billion in the same period, derivatives volumes, even in the face of an overall decline, remained six times larger than spot volumes in Q2 2023, according to Kaiko Research.
Analysts such as Dessislava Aubert from Kaiko have noted a shift in derivatives trading dominance from offshore exchanges, predominantly Binance, towards the potential for growth onshore. Coinbase, with its reputable standing, could draw the attention of institutional clients in this evolving landscape.