April 21, 2021 · 6 min read

Crypto Derivatives

Bitcoin has been on a dizzying rollercoaster ride since March. BTC had been struggling to shoot past $60k for about a month since mid March when BTC hit $61k. Then with the anticipation of the Coinbase NASDAQ listing, the price of BTC surged to over $64k last Wednesday. In the meantime, in the crypto derivatives markets, Bitcoin futures for the June expiry had been trading above $65k, and December expiry above $73k. Bitcoin June expiry futures demonstrated above 40% of annualized premiums on various exchanges and some savvy traders cashed in riskless profit using futures contracts.

Then things turned, a regional power outage in a Chinese mining area and rumoured US regulatory movements caused the  BTC price to tank below $52k on April 18th. Following the price change, the average Bitcoin futures funding rate dropped to as low as -0.03% on the 18th of April according to Glassnode, meaning that there are more short-sellers than long BTC bros. What a big turn in a single  week!

Whether to capitalize on crypto volatility, to hedge risks, or to speculate on this unpredictable market, derivatives have been proven to be valuable for investors and traders. 

This week, we are going to look at crypto derivatives.

Derivatives. What are they?

Derivatives are financial instruments that derive their value from underlying assets such as stocks, bonds, currencies, interest rates, indices, commodities and crypto currencies. Derivatives allow contract holders to gain exposure to the underlying assets without actually owning them. Derivatives also allow the use of leverage to magnify profits. Common types of derivatives include futures, forwards, swaps and options. 

Derivatives are mainly used for speculative and hedging purposes. Derivatives market participants speculate on the future price movements of assets. These speculative activities drive increased market liquidity, enabling participants who wish to hedge their risks to meet the needs. 

For example, with futures contracts, as  the name implies, you predict on a price of an asset in the future at the expiry date, say in 3 months. When the expiry date approaches, you can either 1) offset the position by realizing the gains or losses of your position or 2) roll over to the next month contract if you wish to keep your position going onwards. Futures markets serve an important role in the price discovery in crypto markets. 

Similar to futures contracts, perpetual contracts enable traders to hold leveraged positions without actually having to own the underlying asset, but without expiry dates. Perpetual contracts incentivize traders to stabilize the perpetual price using funding rates. When the price of a perpetual contract is trading below the underlying asset’s spot price, the long perpetual holders pay funding fees to short traders. So perpetuals closely track the index price of the underlying asset.

We’ve seen a troubled year for the traditional financial markets in 2020. Propelled by the global pandemic, the unprecedented expansionary monetary policies by central banks have introduced chaos to our financial ecosystem. Investors, both institutional and retail, have turned to crypto to store and manage their wealth. Falling in step with the crypto boom, the crypto derivatives trading volume naturally surged. Crypto derivatives laid out attractive advantages for those willing to speculate, hedge and earn magnified returns.

Crypto derivatives exchanges

Below, we map out major crypto derivatives exchanges by 24h trading volume and 24h open interest.


Source: Novum Insights up to 20th April 2021

The largest derivatives exchange is Binance, with 24h trading volume of $91 billion and 24h open interest of $8.7 billion. Binance is followed by Huobi whose 24h trading volume stands at $45 billion. Binance, Huobi and OKEx support up to 125x leverage and Bybit, FTX, Bitmex and Deribit support up to 100x leverage. Margin requirements vary. 

According to Coingecko, 24h trading volume of futures and perpetuals are $27.8 billion (up 27% in the past 7 days) and $268.5 billion (up 61% in the past 7 days) respectively across more than 50 derivatives exchanges.

Decentralized derivatives exchanges

The biggest derivatives exchanges  above are all centralized. As DeFi took a giant leap through, we start to see more and more decentralized derivatives exchanges soar. We look at  the various decentralised  platforms that allow you to trade crypto derivatives.

Decentralized options trading

Options contracts give you an ‘option’ to buy or sell an underlying asset within a specific timeframe at a stated price. Unlike futures contracts, options holders are not obligated to buy or sell upon expiry if they don’t want to. 


Started off as a downside protection for ETH price volatility, Opyn now offers WBTC and ETH options that auto-excersie upon expiry. As of writing, WBTC call options for April expiry is priced at $1547.599 at a strike price of $60,000. The long call position will accrue profits once the price of WBTC exceeds $61,547.60 (strike price + call option price).

Source: Opyn 

Opyn has $12.2 million in TVL and has shown a three-fold growth since its options trading platform launch last December.


Hegic is a BTC and ETH options trading platform with any strike price and flexible holding periods. Users can also participate in the protocol to sell options as a liquidity provider. For example, as a liquidity provider, you can send ETH to the ETH Liquidity pool and start earning premiums in ETH. The premiums comes from ETH call option buyers. Liquidity providers then need to swap buyers’ DAI for ETH when the buyers decide to exercise their ETH call options. 

Decentralized perpetuals trading

As mentioned above, perpetual futures are gaining momentum in the DeFi space because they enable traders to take leveraged positions without expiry dates causing inconveniences. Below we compare perpetual futures trading protocols Perpetual Protocol, dYdX and Futureswap.

Source: Novum Insights up to 19th April

Perpetual Protocol is the largest/ the most active derivative DEX for perpetuals trading. The most popular trading pair on the protool is ETH/USDC. dYdX is one of the leading DEXes in the DeFi space supporting margin trading, spot trading and lending along with perpetual trading. Perpetual Protocol and Futureswap both have their tokens and they have decreased in price in the past 7 days.

Up Next...

One of the crucial parts of the derivatives market is synthetic assets, which are financial instruments designed to simulate the underlying asset’s payoff. DeFi household names such as Synthetix and UMA enable users to gain exposure to stocks, indices, fiat currencies, crypto currencies and commodities. We are going to have a deep dive into crypto synthetics in the following post, so stay tuned!