Crypto exchanges are now looking at derivatives after FTX’s collapse

Crypto exchanges are rushing to fill the void left by FTX, once one of the largest derivatives exchanges for digital assets, as the cash market faces declining volume and liquidity.

FTX’s collapse has become an opportunity for other exchanges to gain market share or enter a space now dominated by Binance, the world’s largest crypto exchange. Some exchanges showed interest in buying FTX’s derivatives platform in the US, while others are just looking to build completely new derivatives exchanges. At the same time, the demise of several crypto lenders such as Genesis has caused traders to look for other ways to exploit their positions.

“There is a clear vacuum left in the crypto derivatives market, especially for regulated entities,” said Tarun Chitra, partner at crypto venture fund Robot Ventures. “We’ve seen a number of companies emerge on the centralized side as well as on the decentralized side to fill this vacuum.”

As lenders such as Genesis and Voyager Digital have gone bankrupt, derivatives platforms are one of the few remaining venues that allow traders, especially institutional trading desks, to increase trading in crypto. Institutions prefer products like futures and options to spot trading because “derivatives enable them to have the ability to go long-short and express their view and hedge the portfolio,” said David Martin, head of institutional coverage at digital asset prime brokerage FalconX.

Derivatives account for more than 60% of total total trading volumes, including spot, across crypto exchanges since January 2022, according to data compiled by CryptoCompare.

For hedge funds that primarily trade on US-based exchanges like the CME, the cash-settled futures contracts also prevent them from running into nuanced crypto-specific issues like custody, he added.

Some offshore derivatives exchanges offer a maximum leverage of 100 times for some cryptocurrencies, even after Binance, for example, said it was reducing the maximum leverage a user can take to trade futures contracts to 20 times from 100 times.

The shake-up in the crypto industry, “opens up a lot of opportunities in the market because both FTX’s literal market share no longer exists, and also their brand as someone who built innovative things in the space is obviously no longer the case,” Antonio Juliano, founder and CEO of decentralized exchange dYdX, said in an interview.

Both dYdX and its peers such as GMX were direct beneficiaries of the FTX implosion in November and immediately saw trading volume pick up.

Now that FTX is gone, exchanges like Blockchain.com and Gemini are showing interest in buying FTX-owned LedgerX, which is registered with the US Commodity Futures Trading Commission as a derivatives exchange. Meanwhile, one of the biggest crypto market makers, Wintermute, recently said it is “seriously” considering launching a derivatives exchange for professional traders. And former Jefferies Financial executives just launched a new crypto exchange that will eventually expand into derivatives. All this is happening while Binance’s derivatives business in Australia is under review.

For crypto exchanges aiming to diversify their revenue streams, expanding into institutional-focused derivatives can help them weather bear markets. Many exchanges rely primarily on revenue from transaction fees collected from spot trades by retail traders, whose interest in crypto has waned, especially after FTX.

The recent price rise in Bitcoin has also given derivatives a boost. The world’s largest digital asset by market capitalization is seeing a key $30,000 milestone after gaining about 25% since March 8 following the fallout from Silicon Valley Bank.

Derivatives offer traders a way to capitalize on market volatility while managing risk in unpredictable market environments. More investors are looking for market exposure, especially in derivatives amid price volatility, according to Luuk Strijers, chief commercial officer at derivatives exchange Deribit, which just announced its plan to launch futures contracts to facilitate trading of Bitcoin volatility.

“When the market moves sideways, we see our volume drop,” Strijers said. “But when the markets move … up or down. In those moments, people tend to use options, and of course we take advantage of that.”