Is Bitcoin’s Resurgence Driven By Demand for Derivatives?

Renewed interest in digital-asset futures and options has sparked a revival in cryptocurrency prices.

Derivatives exchange Deribit says that the number of open contracts for Bitcoin options has reached an all-time high in the past few days.

Noelle Acheson, who writes the "Crypto is Macro Now" newsletter, points to data from Coinglass that shows an "astonishing increase" in Bitcoin open interest as measured in Bitcoin itself.

However, options volumes have increased, which some investors take as evidence of possible new entrants. CryptoCompare reports that derivative trading volumes are presently higher than spot trading volumes across all cryptocurrency exchanges by a factor of over 60%.

As a result of the failure of several banks in the traditional banking sector, there has been a resurgence of interest in the digital asset market. The largest token, Bitcoin, was up roughly 70% from the beginning of the year.

Options market exploding

Chris Newhouse, a crypto derivatives trader at crypto investment firm GSR, said "the options market has absolutely exploded with demand and interest on these moves."

"It really seems like other big players have started to step into the options markets," added Newhouse.

The recent turmoil in the US and European financial sectors has already caused the demise of three US banks and led to the acquisition of Credit Suisse Group AG by UBS Group AG over the weekend. As a result, there has been a significant upswing in cryptocurrency prices, which were already experiencing a stellar start to the year.

Advocates of digital assets argue that the industry benefits as more investors recognize that tokens are not subject to government control or the problems that traditional lending institutions face.

Crypto Derivatives Shine

Crypto derivatives have gained immense popularity among speculators.

Following the collapse of FTX at the end of last year, several crypto companies have been exploring the creation of new derivatives exchanges. However, the failure of Genesis Global Holdco LLC and other crypto lenders has prompted some investors to seek alternative ways to utilize their holdings as collateral.

According to Marc Weinstein, a partner at Mechanism Capital, which invests in several derivatives exchanges, the derivatives market is typically multiple times larger than the spot market, following the pattern of equity markets.

"As the infrastructure has improved, the size of derivatives both on- and off-chain is growing," he said.

Institutional traders use derivatives to discuss the market and safeguard their holdings, leading to the rapid growth of the industry.

Some investors are creating a "fake stablecoin" by shorting the derivatives market while retaining their Bitcoin holdings, according to Antonio Juliano, the founder and CEO of the decentralized exchange dYdX.

"If you do that, you effectively have a stable asset that at least has a different risk profile than a stablecoin that has some dollars in the bank," he explained. "That's a great example of how derivatives have been used for hedging," Juliano added.

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