One advantage that traders have in the traditional financial markets over cryptocurrency ones is the option to trade derivatives. Financial contracts for futures, options, and other derivatives have long been a backbone driving new investments and unique commodity combinations.

No Longer the Case

Cryptocurrency-based derivatives have been slowly gaining popularity for the better part of a decade. For experienced traders, their rise represents a sophisticated step forward in what digital assets are capable of achieving.

By offering services that mimic what quantitative analysts and deft-handed traders seek in traditional financial instruments, the blockchain ecosystem demonstrates its viability as a true competitor to the fiat world.

That being said, in crypto’s quest to rival traditional financial trading, the learning curve to get traders involved comes with a learning curve too steep for many to even consider. Remember, crypto doesn’t necessarily function in the same way as traditional currencies. That fact necessitates a degree of financial and technological understanding that some traders don’t want to bother exploring.

Crypto-based derivatives have incredible potential, but the potential doesn’t matter if nobody actually uses these tools. So, it’s time for crypto companies that want to offer derivatives contracts to understand what gaps remain in getting traders and liquidity on board.

Benefits of Crypto Derivatives

The appeal of derivatives like options and futures in crypto is pretty much identical to those in traditional finance. For quantitative analysts, or quants, who work tirelessly to investigate market directions and take positions on movements based on incredibly complex financial models—crypto is a novelty that could lead to generous rewards.

It’s official! Coinbase International Exchange is here. Institutional traders in eligible non-US jurisdictions now have access to trade perpetual futures settled in USDC with up to 5x leverage.

Read more about our announcement ⬇️https://t.co/vrIfK999om pic.twitter.com/E5ssl8NBz3

— Coinbase International Exchange 🛡️ (@CoinbaseIntExch) May 2, 2023

This is exemplified by the crypto derivative market’s potential to benefit from reactivity to news and worldwide developments. For instance, crypto has become a hot-button political issue, given its potential impacts on worldwide markets and continuing development in real-world applications.

More countries are considering launching proprietary centralized digital currencies than ever before, and its adoption continues on a meaningful scale beyond subreddits and Discord groups.

Banks, including investment leaders, have continued to enter crypto as well—especially in the U.S., where the launch of BTC and ETH ETFs opened up a clear pathway for institutional investors to onboard digital assets into their offerings. However, crypto derivatives still don’t have that same ease of access.

DAY ONE in the books for Eth ETFs who did $1b in total volume, which is 23% of what the spot bitcoin ETFs on their first Day and $ETHA did 25% of $IBIT's volume. The gap between $ETHE and The Newborn Eight is a healthy +$625m (a sizable chunk of which *should* convert to inflow pic.twitter.com/jaP4dKLrOs

— Eric Balchunas (@EricBalchunas) July 23, 2024

Bridging the Derivatives Gap

The entry point for derivatives is steep. Even in traditional finance, it’s not as though most retail investors are deeply involved in analyzing financial models to trade in futures or options. So, it’s not surprising that adding another layer of complexity with the unique facets of cryptocurrencies would be an aversion to many.

It’s fine not to create every financial product for everyone. In fact, people need to know what they’re getting themselves into when it comes to investing—particularly in derivatives. However, there does need to be a concerted effort to make these financial instruments more accessible to those who want to explore them, especially in crypto, an industry that already frequently grapples with accessibility.

One project working to close that gap is Thalex, a crypto derivatives exchange and trading platform that puts access at the forefront of its offering—making sure that anyone has equal footing to easily enter the burgeoning sector.

New crypto options and futures exchange #Thalex closes Series A funding round. #Options #Crypto @FlowTraders @Bitstamp @bitfinex @IMCTrading @wintermute_t @QCPCapital pic.twitter.com/aV8Uoqvj18

— Thalex (@ThalexGlobal) July 7, 2022

A key component of Thalex’s ethos and development is streamlining the crypto derivatives experience without sacrificing its nuances. By offering stablecoin-settled contracts, the platform also eschews the needless complexity and convoluted processing of inverse derivatives contracts that are mainly popular within the crypto space.

Stablecoin-Settled Contracts

In practice, offering stablecoin-settled contracts greatly elevates Thalex’s usability. Traditionally, this involves using cryptocurrencies like Bitcoin or Ethereum as both the underlying asset and collateral for each trade. So, the contract’s value relates inversely to the underlying asset’s price—meaning if Bitcoin’s price rises, the contract’s value drops.

Since this can also happen the other way around, both losses and profits are settled in the currency itself, leaving traders exposed to potentially higher volatility and complicated pricing dynamics. This might be ideal for traders or institutional investors with a much higher risk appetite since the potential for higher gains is exponentially greater.

Revolut plans to launch stablecoin

Revolut, the financial technology giant, is reportedly planning to launch its own stablecoin, according to CoinDesk. A spokesperson for the company stated that Revolut aims to expand its cryptocurrency offerings, prioritize compliance and…

— CoinNess Global (@CoinnessGL) September 18, 2024

Some exchanges like Deribit, which also focus on derivatives trading, have built a robust platform and community by using this model over the course of many years despite the heightened loss factor. With the Deribit covering a large majority of the crypto derivatives market today, it clearly is a strategy that works for some.

Volatility Risk

However, stablecoin-settled contracts still give Thalex a key point of difference. For those unfamiliar with it, a stablecoin is a digital currency tied to real-world assets, most commonly a fiat currency like the USD. In derivatives contracts, stablecoin-backed options utilize stablecoins as collateral for trades, directly relating the contract’s value and the underlying asset’s price.

This greatly reduces the volatility risk since the collateral and settlement are in a stable currency, simultaneously allowing Thalex to offer a much simpler pricing model for trades. Yes, stablecoin-settled contracts reduce the potential for ultra-high yields. However, they do broaden access to crypto derivatives by making them more approachable for traders of any background.

Coinbase is planning a pivotal acquisition that will allow it to launch crypto derivatives in the EU https://t.co/7jH4kxkpf1

— CNBC (@CNBC) January 5, 2024

Another key fixture of Thalex’s spread is strategically partnering with other exchanges to easily onboard their services to new audiences. This enables the platform to grow sustainably while meeting potential traders where they are.

Likewise, by treating institutions, retail quants, and traders with the same level of respect, Thalex is helping lead the charge on more accessible derivatives experiences. Derivatives will continue to grow in crypto and offer enticing strategies to quants and experienced traders. But if it wants to break the glass ceiling on adoption, platforms must step up and create more opportunities for broad adoption and exploration.