Institutional investors join crypto through crypto derivatives / futures trading
in Derivatives
For several years now, institutional participation has acted as a semi-holy grail that many in the cryptocurrency ecosystem have sought. Experts seem to agree that one essential catalyst for real growth will be the engagement of these players, and slowly but surely, more and more of these commendable entities have joined the frauds.
In the past, attempts to create further institutional ramps have been less than fruitful. Tireless efforts by VanEck, Wiltshire Phoenix, and Bitwise to create an exchange-traded fund (ETF) based on cryptocurrencies have largely fallen on deaf ears. The Security Exchange Commission (SEC) has repaid countless ETF bids over the years, citing volatile custody solutions, market immaturity, and ease of handling in each rejection.
Vehicles for adoption
The community has long abandoned the idea of a crypto ETF. Moreover, there are already a number of avenues for institutional traders to occupy themselves in the growing crypto markets.
Instead of taking the opportunity to get involved with the organization, crypto futures exchanges like Bitfinex embraced these new accredited traders. Tailored to meet the specific needs of professionals, Bitfinex fostered corporate accounts, offered institutional-grade connectivity and quickly authenticated according to the legal features of crypto derivatives markets.
Further liberalization of institutional investors was aided by the entrance of financial giants like Fidelity Investments and Bakkt of the Intercontinental Exchange. These highly regarded institutions provided an atmosphere of legitimacy to a space that desperately needed credibility. In turn, institutional traders previously advised to stay far away have begun to take a second look.
This is not just a recent event either. Since the end of 2017 a surplus of these entry points catering specifically for institutional investors has increased. Among them, the Chicago Mercantile Exchange (CME) – offering one of the first regulated bitcoin futures trading instruments. The rapid rise in cryptocurrency derivatives trading quickly became essential to institutional adoption. However, while the CME does allow for institutional speculation to the market, involvement in the true meaning of the word largely ceases. Rather than having the contracts settled in bitcoin – and thus adding to the overall liquidity of the underlying markets – CME’s bitcoin future is settled in fiat.
Nevertheless, thanks to the CME, the curiosity of institutional traders has been defeated. Where the CME has successfully paved the way for accredited traders to speculate, exchanges such as Bitfinex and its crypto stable future offer a direct method for tangible and versatile pooling. For example, Bitfinex settles all of its crypto futures contracts in USDt, giving institutional players the added benefit of contributing liquidity to the broader crypto market.
The future of crypto: The ultimate catalyst for organizational participation?
Institutional funds were always supposed to be drawn to futures trading strategies. Derivative trading is a concept that many accredited investors understand well. Their prevalence in the US extends back to the 19th century with the onset of grain futures markets. Today, these instruments remain the preferred method of trading among Wall Street players – allowing for a capital-efficient approach to exposure while mitigating unnecessary risk.
In fact, the common attributes found between traditional futures and crypto futures are likely to stand in one of the sweeping reasons why institutional traders are so stunned by the latter. The ability to speculate on cryptocurrencies – while negating the risk typically associated with holding them – is an interesting opportunity for many traders.
Moreover, futures markets usually reduce the risks of manipulation. As discussed, the fears about manipulation in the underlying cryptocurrency markets have been an essential reason to keep many institutional investors at bay. Nevertheless, thanks to the practices used by crypto futures market makers, unfair liquidations by manipulation are often avoided. Bitfinex, for example, employs a mark-price system to set the value of the contract fairly. This is calculated by an evenly weighted price index of pairs traded across multiple exchanges – ensuring the fairest possible price.
The diversity of the crypto future
Of course, while the majority of institutional traders are likely to gravitate toward derivative offerings from the CME or Bakkt, instruments provided by crypto-based platforms have several advantages over the aforementioned institutional front-runners.
First of all, crypto futures platforms like Bitfinex enable the use of leverage. Allowing leverage within derivative offerings boosts purchasing power and enhances potential returns. Further, by employing leverage, the barriers to entry are reduced – developing adoption and allowing for a broader and more diverse demographic trader.
Flat contracts are another aspect available on crypto-based futures platforms. Bitfinex is one of the leading providers of flat contracts. These offerings work in much the same way as traditional futures, just on a rolling basis. As long as a trader can finance the situation, flat contracts can remain open for as long as desired. Furthermore, this approach also negates the costly fees associated with periodic job renewals.
* The derivatives platform is provided by iFinex Financial Technologies Limited. References to Bitfinex Derivatives in this post are references to iFinex Financial Technologies Limited.