It’s not just bitcoin futures products that are becoming popular with investors, at least according to one U.K.-based crypto derivatives provider.
Crypto Facilities, a subsidiary of the San Francisco-based exchange Kraken that provides bitcoin and ether reference data for CME Group and has offered its own derivatives products for years, has seen trading volume in its altcoin futures markets jump dramatically in recent weeks – in particular, its litecoin and bitcoin cash futures contracts, said head of indices and pricing products Sui Chung.
He told CoinDesk that the company had seen a dedicated following for each coin since litecoin was listed in June 2018 and bitcoin cash two months later, “but relative to bitcoin and ether [those contracts] were pretty small in terms of volume.”
This changed after Kraken acquired the startup earlier this year.
“We began to onboard Kraken users … [and] that’s basically given us better exposure to the communities around litecoin and bitcoin cash, and I think what we’re seeing is those communities have a pretty strong interest in trading derivatives for litecoin and bitcoin cash, respectively,” Chung said. “The volumes have gone up pretty appreciably.”
Prior to the acquisition, Crypto Facilities saw its litecoin futures contracts average around $15 million in notional volume each month, while its bitcoin cash contracts saw roughly $10 million per month.
By contrast, last month, the litecoin product saw $100 million notional volume, while bitcoin cash was just under $50 million, Chung said.
Settled in crypto
Chung does not think that Kraken’s userbase is the sole contributor to the increasing volumes, but rather just one of a number of factors.
In particular, he stressed that Crypto Facilities is one of the few – if not only – exchanges that offer regulated altcoin futures contracts that pay out in the underlying cryptocurrencies. Speaking to litecoin and bitcoin cash specifically, Chung believes that there was some pent-up demand for such regulated contracts (Crypto Facilities is regulated by the U.K.’s Financial Conduct Authority).
While these futures are cash-settled, both sides of the transaction are paid up in the base asset. As a result, buyers are delivered the actual cryptocurrency when the contracts expire, unlike the cash-settled bitcoin futures of the Chicago exchanges CME and Cboe, which pay fiat.
“I think there was always demand from those communities for a strong derivatives contract that is collateralized and paid out in that coin because there are contracts in other markets … where the base asset is litecoin but they pay out in bitcoin,” he said. “Our contracts are paid out in litecoin and bitcoin cash.”
He cited BitMEX, which offers a number of crypto futures products, as one platform which settles in bitcoin (a spokesperson for BitMEX confirmed that all deposits to, and withdrawals from the startup’s wallets are in bitcoin).
“I think the broad trend we’re seeing is … there’s obviously demand for regulated futures contracts for crypto that is denominated and paid out in crypto.”
The litecoin and bitcoin cash communities “have an appetite for trading derivatives,” he said.
The lonely outlier
Volume boosts aside, not all altcoin futures are exploding. In particular, the demand for XRP futures has remained relatively stable, despite the outpouring of support for litecoin and bitcoin cash, Chung said.
“XRP has been pretty steady, it’s always accounted for about between 5 and 10 percent of our market and that hasn’t changed,” he said, explaining:
“Interestingly, that hasn’t really changed [from] before the acquisition, post acquisition, in all the time we’ve had that contract … [the acquisition] hasn’t seemed to have affected that.”
This does not mean that XRP contracts are losing market share or dropping in volume. The raw numbers for Crypto Facilities’ products are increasing across the board. However, XRP futures’ volume is not growing as quickly as litecoin and bitcoin cash futures.
By process of elimination, that means bitcoin and ether futures contracts are losing market share, even as their volume grows. More traders are onboarding and bringing new liquidity to Crypto Facilities’ products, “but [volume is] not increasing at such a dramatic rate, market volatility is subdued,” he said.
In fact, Crypto Facilities saw its overall trading volume jump some 500 percent, nearing $1 billion traded across its various contracts in just the first month after Kraken acquired the platform.
If Kraken’s user base spurred Crypto Facilities’ recent growth, its future may well come from an influx of institutional capital, Chung said.
In recent weeks and months, the company has been contacted by various funds and other major firms looking to dip their toes into the crypto derivatives market. “I think we can say there’s heightened interest … from traditional financial institutions,” Chung said.
Market makers, brokers and other firms interested in bringing crypto derivatives products to their clients have begun reaching out to discuss participating in Crypto Facilities’ markets, he said.
And while preliminary, their interest is serious, Chung said, explaining:
“These institutions are in the early stages of exploring this, but at the same time I think the interest we’ve seen are coming from, it’s not driven by hype, it’s not as if the price is going up [or] doubling every month. It’s more considered than previous waves of inquiry.”
These companies have researched what processes and infrastructure they would need to develop in order to become more involved in the crypto space, he said.
“They’ve done a lot more homework about what it means to be involved in crypto,” Chung said. “The interest is not driven by the prospect of crypto doubling in price every morning, it’s driven more by them saying ‘hey there’s a market here.’”
That being said, institutions are not about to jump head-first into the space just yet. Chung said the firms which have expressed interest are still evaluating the risks, so that when they do enter, it is in a more controlled manner than entrants at the peak of the last bull run.
“It’s much more considered than the interest that we once saw in early 2018,” he said.
UPDATE (April 1, 15:45 UTC): This article was updated to correct the categorization of Crypto Facilities’ altcoin futures. They are technically cash-settled, even though the contracts pay crypto.
Litecoin image via Shuttertock