The Worrying Case Of cryptocurrency Derivatives Around The World

The world of cryptocurrencies is eagerly awaiting the upcoming Bakkt physical bitcoin derivatives to be launched this year. The possibilities that these new investment assets hold for bitcoin and the overall cryptocurrency market include increasing liquidity in the market and investors’ adoption rates too. However, cryptocurrency derivatives have their flaws, as any new asset, which has caused financial authorities to take action.

A derivative is a security that derives its value from another asset, in this case bitcoin or another cryptocurrency. Here is where the problem lies, cryptocurrencies are volatile assets and hence having them as the underlying asset to the derivatives may cause a market collapse. The 2008 financial crisis should serve an example as credit default swaps (CDS) on mortgages collapsed.

Cryptocurrency derivatives are gaining rapid adoption amongst the big financial players who wish to offer the assets. Crypto prices will need to remain stable and volumes of trade to improve according to the chairman of Concordium and Founder of Saxo Bank, Lars Seier Christensen for him to join the crypto-derivatives market.

The current state of cryptocurrency exchanges is not helping the cause as various fraudulent activities are reported including faking volumes, security issues and hacks. These problems should be solved before investors can trust the exchanges. Speaking on the matter Christensen said,

“On the other hand, if trading picks back up, it is quite likely that we will see a slew of new initiatives being launched — perhaps even some that have already been planned and gone through due diligence but where the offering party have been waiting for a better time to launch.”

Other financial firms include NASDAQ, Cboe Global Markets, and Goldman Sachs.

As financial firms around the world hop on to launch options, futures, swaps and other derivative products, U.K. Financial Conduct Authority (FCA) is looking to regulate the cryptocurrency derivatives present in the country. In a statement to the press during the Regulation of Cryptocurrencies event in London, Christopher Woolard, executive director of strategy and competition at the FCA expressed his concern on the increasing number of fraud assets being sold to the public.

The sentiments by Woolard were shared by the CEO of INVAO, Frank Wagner, who also added that the retail investors will be sold inefficient and complex derivative products such as swaps, CDF’s and options. Most of these products are derived from manipulated exchange data and leveraged which spells a recipe for disaster according to the FCA.

He further explained that the volatile nature and uncertain environment of cryptocurrencies causes difficulty in predicting the market. Derivatives have failed in traditional markets which further shows the need for regulation according to Wagner. He further said,

“Making accurate predictions on prices in the cryptocurrency market is difficult. This is combined with the fact that derivatives themselves have a poor reputation. There’s a lot of anticipation that crypto derivatives will actually make the market more reliable and legitimate by boosting investor activity, mainstream attention, and thus liquidity and trading volumes”

Cryptocurrency derivatives face risks of failure from their volatility and low adoption rates. These problems can be mitigated through dynamic regulation on the derivatives to ensure the efficiency and reliability of the assets. The field will only thrive if the derivatives are regulated, legitimate and secure for investors. Regulation will help the cryptocurrency market stabilize and reduce the wild volatility.

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