Derivative Trading Volume Up in July

25 August 10:02

[TL; DR]

🔹 The trading volume of crypto derivatives rose to 13.5% in July.

🔹 Crypto derivatives make up 69.1% of the whole crypto market.

🔹 The hype around the Ethereum Merger and the London Hard Fork has created upward price momentum for ETH and other cryptocurrencies.

🔹 Leverage has several risks such as liquidation of assets.

Introduction

Cryptocurrencies and other digital assets are disrupting the financial sector as they give rise to new investment instruments such as crypto derivatives. So far, crypto derivatives are popular among investors and they open up new investment opportunities. After a period of depressed market, the prices of derivatives recovered in March this year. The development in July shows that the crypto derivatives’ continued with an upward drive. This coincided with the rallying of many cryptocurrencies such as bitcoin and ETH.

There were mixed fortunes in July. This is because many cryptocurrencies had bullish momentum but did not reach the expected price levels. For instance, investors still expect bitcoin to rally beyond $40 000 and ETH above $3 000. Comparatively, a cryptocurrency like BTC ended the month of July at a reasonable price of $23,310, an increase of 22% from the previous month. ETH closed the month at $1,679, approximately 62.8% rise from June price. The hype surrounding the Merge was a key driver of ETH’s upward price momentum.

The same uptrend occurred with the market for crypto derivatives. In its monthly crypto report, CryptoCompare established that the trading volume of derivatives increased by 13.4% in July, closing the month with a total capitalization of $3.12tn. All these changes in trading volumes and activities during July show an increase in crypto speculative activities.

What are derivatives?

A derivative is a contract or asset whose value depends on that of an underlying asset. We can also define it as a contract between a seller and buyer to trade an underlying asset at a particular date and price. Note that derivatives do not have intrinsic value, their prices depend on that of the underlying assets.

When you have a derivative trade it does not mean you will get the underlying asset. Examples of underlying assets in the traditional financial market include shares, stocks, commodities, bonds and fiat currencies. On the other hand, examples of underlying assets in the crypto sector are cryptocurrencies like bitcoin and ETH. For instance, you can trade BTC Futures.

Types of derivatives

Future: A future is a contract entered between two parties to buy and sell an underlying asset at a given date and price. However, some traders close their positions before the agreed date in order to get profit.

Crypto exchanges offer future contracts on behalf of their users. However, the buyer may choose not to acquire the underlying asset but benefit from its price fluctuations. An ETH future holds the same value as the ETH itself. This means the traders gain or lose from the changes in the value of ETH.

Option: An option is a contract between two parties to buy and sell an underlying asset at an agreed date and price. However, the two parties do not have obligations to fulfil the agreement.

Perpetual swaps: A perpetual contract is similar to a future except that it does not have an expiry date. As a result, the traders can keep their positions open for a long period.

Derivative performance in July

As said, the total volume of derivatives increased in July due to increased interest in them. However, while the trading volume of derivatives on centralized exchanges increased, the trading volume of spot trading decreased significantly. CryptoCompare reported that the volume of spot trades fell by 1.34% to $1.39tn. This is the first such a decrease since December 2020.

There are a few reasons for the rallying of the crypto derivatives. For example, the Federal Open Market Committee meeting to review the Fed rates will take place in September, giving investors a relief. Also, the crypto market responded well to the expected Ethereum Merger and London Hard Fork. The graph below gives a summary of the trading volumes of crypto derivatives and spot trades from August 2020 to July 2022.

Source: CryptoCompare

The graph shows that the crypto derivative market had lower than expected trading activity since June 2021. May 2021 recorded the greatest derivative trading volume and remains a watershed month to date. Before that, the trading activities in derivatives gradually increased from August 2020 to May 2021.

During the current year, March had the highest crypto derivative trading volume. There was a decrease in trading volume of derivatives in May and June, before the July rally. At the moment, crypto derivatives make up 69.1% of the whole cryptocurrency market. On 29 July, the highest total derivative trading volume on exchanges was $245bn representing a 9.71% increase from June’s “intra-month high of $223bn.’
The reason why many traders prefered crypto derivatives over spot trade in July could be leverage. In simple terms, leverage is the practice of borrowing funds to make trades, aiming to make a higher profit margin than using your own. For instance, if you have $1 000 in your crypto account, you can trade with $2 000, if the leverage is 100%.

However, leveraging has its own risks such as incurring higher losses than in a normal situation. Second, it leads to liquidation, meaning that your entire amount is used up due to the borrowed funds. However, many traders use leveraging if the marketing is performing well or is in an uptrend.

Conclusion

In short, July recorded an increase in the trading volume of crypto derivatives. Analysts believe that an increase in speculation led to this rally. However, the fall in the year-to-year inflation rate in July as well as the news of the Ethereum Merger and the impending London Hard Fork created confidence in the market which could have led to upward movement in prices of most top cryptocurrencies.

Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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