Derivative exchanges are becoming increasingly popular and taking up an ever-larger share of trading volume. These products track the price of cryptocurrencies but are not the actual cryptocurrencies. They are the tool of speculators who wish to capitalise on price movements.
Derivatives are also a popular instrument in the traditional markets. Professional traders participate in futures, options, and other derivatives markets which derive prices from products such as commodities, equities, and precious metals. Recent BitMEX reports show that the derivatives trading in cryptocurrencies account for more than one-quarter of the total trading volume despite there being just a few key cryptocurrency derivative exchanges in the market.
Trading in derivatives markets is a completely different experience than trading in spot markets. Derivatives are typically leveraged or have the capability to be leveraged. With prices being derived from spot prices making it its own instrument, there is also the concern of liquidity and volatility. Even if the underlying instrument remains stable, a lack of liquidity could lead to a quick crash or spike in the price of the derivative instrument. We delved into different cryptocurrency derivative exchanges to present the ones which are the most liquid and that have the most attractive features.
BitMEX is the most popular by a significant margin when it comes to cryptocurrency derivative exchanges. The exchange is headquartered in Hong Kong and its flagship product is an instrument which tracks the price of Bitcoin against USD. The product alone accounts for a huge percentage of the Bitcoin trading volume and commonly accounts for over 20% to 30% of the trading volume of Bitcoin against USD.
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One key point to note with BitMEX is it only deals in Bitcoin. When you make a trade on BitMEX, you are risking your Bitcoin funds. When your trades perform well, the balance of your Bitcoin will increase. The following derivative products which track the price of the standard spot pair can be traded on BitMEX:
The majority of the products will expire on a quarterly basis which means that you can hold most of the contracts for a maximum of about three months. The most popular product is the perpetual Bitcoin priced against USD derivative which does not expire and can be held for any length of time.
BitMEX has a suite of professional trading tools and has some capabilities which a lot of other exchanges cannot provide. In terms of tools, BitMEX has an order book, depth chart, trades printing, price chart, and a host of technical analysis tools which can be used on the price chart.
BitMEX has enormous leverage capabilities and users can leverage up to 100x on some products. The perpetual Bitcoin/USD product can be leveraged up to 100x which means that to speculate the equivalent of 100 Bitcoin only requires 1 Bitcoin of the users own funds. Users can go both short and long. If the trade goes the wrong way, the most you can lose is the funds you put into the position.
The fees for BitMEX are 0.075% for market takers and a 0.025% rebate for market makers. Market makers are traders that place limit orders that provide much-needed liquidity. Market takers are traders which take the best price possible at a given time and take away liquidity. The fees are calculated on the total value of the position.
In the last example, where 100 Bitcoin was traded using 100x leverage, this means that market takers will pay a 0.075% fee on 100 Bitcoin despite their own capital in the position only being 1 Bitcoin. This means users will pay hefty fees on leveraged positions if they are market takers. There is also a funding rate applied to positions and occurs every eight hours a position is open. The funding rate involves either the shorts paying the rate to the longs or vice-versa. The funding rate can be monitored on the home screen dashboard.
With BitMEX being both the most popular and most liquid, it is operating on the frontier of cryptocurrency derivatives. It can be complicated to use for beginners but many intraday traders in the cryptocurrency markets conduct their trading activities here.
BaseFEX is a recently launched crypto derivative trading platform that aims to provide a transparent, reliable and user-friendly derivative exchange, that can be accessed by traders located worldwide. It allows users to trade perpetual future contracts (with no expiry date) for both Bitcoin and Altcoins.
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At the time of writing, it supports 10+ pairs which include BTCUSD, ETHXBT, XRPXBT and more. For Bitcoin contracts, it offers up to 100x leverage whereas for altcoins the leverage is between 20 to 50x. The trading interface, as described on our BaseFEX review, is not only intuitive but also filled with the in-depth price & market charts, real-time position of assets and more.
BaseFEX exchange makes use of the best security practices in the industry and stores user funds on multi-signature cold storage wallets. For making any transactions, 5 out of 7 partners need to sign the transaction, which helps to provide the utmost security for users’ digital assets. In addition to this, it offers 2FA protection to prevent customer’s accounts from unauthorized access. Moreover, the exchange doesn’t store any of the public or private keys on its servers to provide better privacy and security.
At the time of writing, BaseFEX accepts only Bitcoin deposits to trade perpetual futures contracts. The exchange operates on the maker-taker model and only deducts a nominal trading fee. The maker fee is nil for most of the assets, whereas the taker fee ranges between 0.07% to 0.20%. A funding fee is also applicable and is based on the type of fund (Short/Long).
Even though it is too early to give a verdict on BaseFEX exchange, it is a good competitor to other popular derivative exchanges like Bitmex and Deribit.
Deribit is one of the main competitors to BitMEX. Deribit provides both cryptocurrency futures and options. The exchange is based in Amsterdam and offers both futures and options products. Deribit operates in a similar fashion to BitMEX in the manner that it only operates in Bitcoin.
The perpetual Bitcoin USD product on Deribit enables users to leverage up to 100x when speculating on the USD price of Bitcoin. While BitMEX also offers this, Deribit has a more developed options exchange. Options are another type of derivative instrument which enables users to speculate on the price of the underlying instrument. Although there are further intricacies, essentially, call options are used when speculating on the price going up and put options are used when speculating on the price going down.
While BitMEX delves into altcoins, Deribit just focuses on Bitcoin. There is a perpetual futures contract for Bitcoin and also contracts which expire quarterly. The fees for the perpetual contract are 0.075% for market takers and a 0.025% rebate for market makers. The fees for quarterly contracts are 0.05% for market takers and a 0.02% rebate for market makers. Options fees are 0.04% of the underlying or 0.0004 BTC per option contract.
Deribit has advantages and disadvantages when compared to BitMEX. It competes closely on a lot of factors and has a more developed options market. Nonetheless, BitMEX has far superior liquidity and also enables traders to speculate on the Bitcoin price of various altcoins.
OKEx is an exchange which offers both spot and derivative trading products. OKCoin is the parent company of OKEx and has been operating since 2013. OKEx was launched in 2017 and is headquartered in Hong Kong.
The derivative products offered are futures which enable traders to apply large amounts of leverage up to 20x. The trading platform is aimed at professional traders and has a number of tools. Traders need to fill out a quiz to demonstrate their knowledge of futures products before participating. The features include an order book, price chart, technical analysis tools, and algorithmic trading tools.
In terms of fees, there are eight levels of progressively decreasing fees based on volume traded. The fees start at 0.01% for market makers and 0.03% for market takers at the lowest tier. The highest tier has a 0.01% rebate for market makers and 0.02% for market takers.
Some of the key benefits of OKEx is offering derivative trading products at low fees that can be traded with fiat currency. The key limitation is that trading in Euro is not yet supported and the exchange has only been launched since 2017.
bitFlyer is a Japanese headquartered exchange which has been operating since 2014. The exchange launched bitFlyer Lightning in 2015 which offers derivative cryptocurrency products along with spot trading and ForEx to clients.
The futures available enable users to speculate on the price of Bitcoin against the Japanese Yen (JPY). Users can avail of leverage up to 15 times their margin (deposit). Both Bitcoin and JPY can be used as margin. There are three different types of futures offered on the exchange. There are futures with weekly, monthly, and quarterly expiry dates. The futures products enable traders on the exchange to go both short and long whereas bitFlyer’s spot products do not provide this capability to traders. The exchange has an order book, price chart, and recent trades printing. The futures products have no fees to trade.
The key limitation of the derivatives of bitFlyer Lightning is the limitation in the number of the number of products offered. Bitcoin is only offered priced against the Japanese Yen which would mostly be relevant to Japanese clients. There is also no altcoins products available. Some of the key benefits include that the product would be highly useful for those trading in JPY and the product is also free to trade.
For traders and investors with large amounts of capital, both the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) launched Bitcoin futures products in 2017. Both marketplaces are highly regulated and offer a means for larger investors and institutional investors to participate in speculating on the price of Bitcoin. All contracts are denominated in USD.
The CME contract is based on 5 Bitcoin while the CBOE contract is based on 1 Bitcoin. CBOE requires 40% initial margin to trade their product and the CME requires an initial margin of 35%. With the products being traded on regulated exchanges, users would have to trade the product either through a registered broker or via owning a seat on one of the exchanges. This requires large amounts of capital and makes the product unsuitable for most who are trading in cryptocurrencies. The exchanges apply circuit breaks to assist in handling the volatility of the market. Circuit breakers halt the market if the price moves a certain percentage within a trading session. Unlike online cryptocurrency exchanges which operate 24/7, trading in these products is only available during specified market hours.
While these products provide the opportunity for larger investors and institutions to speculate in the cryptocurrency market via derivatives, they are highly unsuitable to the majority of investors seeking to participate in the cryptocurrency markets.