No one can know for sure what’s going to be hot in crypto next year. But if you had to guess, a pretty good place to look is whatever made a lot of money this year. The success of ETH paved the way for 2017, The Year of ICOs. The ICO bubble began popping in early 2018 but many weren’t shocked to see exchanges and quant trading firms become Big Deals in 2018 after how well they’d (more quietly) done in 2017.
Come late 2018, many people were perplexed about what the next big thing was going to be. Lower volatility and prices mean lower trading volumes--bad for both exchanges and quant firms. There was trans-mining--but even at the time I think no one really mistook repackaged wash-trading for long term sustainability. It seemed that the Age of Influencers was beginning to wane too, and there was nothing obvious to take the whole vacated by 2017’s stalwarts.
There was something waiting in the wings. It just wasn’t obvious, because CoinMarketCap hadn’t--and as of writing this a year later still hasn’t--included derivatives. If you’d asked most people in crypto how much volume traded in derivatives, they’d have been too low by a factor of 10; and if you’d asked where it traded they would have been able to name only one venue--BitMEX. The lack of recognition that other derivatives platforms got was particularly surprising given that 2018 really turned out to be The Year of OKEx Futures. Both the highlight--EOS’s incredibly bull run in the spring--and the lowlight--the giant crypto crashes of the fall and BCH/BSV expiration shitshow of the winter--were driven by the Chinese futures platform quietly trading billions per day. Meanwhile CoinMarketCap proudly advertised the suite of trans-mining exchanges at the top that were clearly not made for the long run.
But some people saw 2019 coming. China did relatively well, having seen OKEx’s futures volumes; so did some of the quant firms trading on them (which, of course, is where I came in). And so did OKEx’s competitors, with Huobi launching futures late in the year and Binance later following suit. By mid 2019 the luster had fallen from CoinMarketCap, the memes started spreading, and it became clear to the world that 2019 was The Year of Derivatives.
By now every top exchange is, at least in part, a futures exchange. Binance, Huobi, OKEx, and Bitflyer all have futures, with BitMEX, FTX, Bybit, and Deribit specializing in them--and those are probably the world’s top eight exchanges in real volume. Nearly every exchange that has both spot and futures sees the majority of its volume through the latter.
Where Are We Now?
So what have derivatives looked like in 2019?
The vast majority of volume has come from futures. Options do play some role, and have been instrumentally very important to Deribit’s success, but roughly 90% of all crypto derivatives volume happens in futures. We’ve also seen perpetual swaps--essentially a type of daily futures contract that automatically rolls you to the next contract instead of expiring--steadily gaining recognition and volume while expiring futures (OKEx’s mainstay) have been relatively flat in volume.
2019 has also been the year that crypto derivatives exchanges start to clean up their acts. The space was a shitshow in 2018 despite its success. Nowhere is that clearer than with clawbacks. Whenever a trader buys on leverage--buys more of a future than they have collateral--they would go beyond bankrupt if the future went to 0. And so it’s the exchange’s job to figure out when the trader will go bankrupt, and to close down their positions before it gets to that point (at least in crypto--the rest of the world has clearing firms for this purpose). In order to do this, they need to liquidate the account’s positions, selling off all of the futures before running out of time. If the exchange fails--if markets have fallen enough that the account is beyond bankruptcy by the time its position has been fully liquidated--then the account has net negative value and someone has to foot that bill. Maybe the exchange has an insurance fund! But if this is a common occurrence, probably it has already used that insurance fund. And so the other users--the ones who didn’t blow out--end up eating the loss. That’s how you end up where crypto did in 2018, with hundreds of millions of dollars lost to clawbacks.
In addition to clawback risk, derivatives were clunky. If you wanted to get short EOS futures, you had to first go… buy spot EOS, because it was the only form of collateral OKEx accepted to trade EOS. That meant that traders had to manage 9 different non-fungible collateral wallets for OKEx futures alone--and soon thereafter another 9 for OKEx perpetual swaps.
In 2019, many of the problems have started going away. I’d like to think that some of this, at least, is because of FTX’s influence and competitive pressure. Over the course of the year, exchanges have been slowly migrating to a new framework for crypto derivatives, one that mirrors the rest of the financial world more closely: linear, USD-settled, cross-margined futures without frequent clawbacks. OKEx and Bybit are working on cross-margined USDT settled futures; Binance futures already uses USDT cross margin. OKEx significantly revamped their risk controls, and the rate of clawbacks has gone way down.
Meanwhile, some other derivatives exchanges are expanding their offerings. FTX has added spot markets, fiat, and options; Deribit has added ETH; Binance is adding more underlyings; and soon every major crypto derivatives exchange will probably have perpetual swaps.
The two dominant forces of 2018 derivatives, on the other hand, spent most of the year standing still. BitMEX hasn’t significantly changed anything in a long time, and OKEx spent the first half of the year in stasis as they worked on cleaning up their issues from 2018. This is some of what spurred the explosion on the number of futures venues: the two largest players were stagnant and that left the door open for Huobi, Bybit, FTX, and Binance to join the fray.
Where Are We Going?
What will 2020 bring for crypto derivatives?
Certainly there will be tinkering, but I don’t expect to see as many changes in the futures landscape in 2020 as we did in 2019. The script has been written, and most of what’s left is to watch each derivatives exchange figure out how to implement what--ahem--someone sent them in whitepapers throughout 2018. Meanwhile the world will watch as they duke it out for volumes.
To the extent there will be seismic changes, I don’t think it’ll be in BTC futures; instead people are looking towards other types of derivatives. Options are the most prominent, though I think that crypto futures on other underlyings and the tokenization of derivatives and will have their moment in the sun too. None of these are sure bets, though; there are traditional finance analogues that are huge but no one has yet gotten large volumes from them in crypto.
So what will be 2020’s Flavor Of The Year? Well, what’s been quietly happening in 2019?
One thing is consolidation. Exchanges that never made money are dropping like flies, as are coins that never had any adoption. The era of 200 fake exchanges getting decent amounts of real volume is coming to a close, as is the era of 200 coins which might be The Next Bitcoin.
Another guess is an emphasis on use-cases and revenue--you know, the kind of things you’d use to judge a normal company. Exchange tokens did well in 2018 and 2019--and may continue to in 2020--and they’re an example of a crypto token that has actual integration and value. I expect to see more of this in 2020; people creating crypto-integrated businesses users actually want, and then integrating a token into them.
And a third guess is remittances. If you look at where, right now, crypto is creating economic value--one of the clearest examples are people looking to move money from one country to another as they quickly realize exactly how poorly international wire transfers work. And so maybe 2020 will be The Year Of Fiat.
So what’s the most 2020 business I could imagine? I guess it would look something like this. Take a crypto-native remittance/international money transfer business, grab a huge amount of market share, and then tokenize the business and/or the process.