21Shares Research Newsletter - Issue 37

Market Outlook

One unavoidable trend over the last year within the crypto asset market has been the rapid growth of the Bitcoin derivatives market. Exchanges like BitMEX, Binance, Deribit, OKEx, and FTX have staked claims to become the market leader within the space by offering new ways for investors to increase or hedge their exposure to the crypto asset market.

While 2019 saw the spread of Bitcoin Perpetual Swap contracts across a deluge of exchanges — having been originally created by the market leader BitMEX. 2020 will see the spread of Bitcoin options and a range of tokenized derivatives and products which will allow investors easy access to things like short exposure, volatility, and perhaps even Bitcoin mining hashrate.

The fact that two of the most innovative crypto derivative companies, FTX and Deribit, have recently closed rounds at near-nine figure valuations shows how large a market opportunity there is for crypto-derivatives — tokenized and otherwise. We expect this to be the key growth story over the next year and it will be interesting to see how the burgeoning crypto derivative market reacts to events such as the Halving or other geopolitical shocks.

The performance of the top five crypto assets is a follows: BTC (-0.17%), ETH (0.46%), XRP (-1.06%), BCH (9.34%), and LTC (7.04%).

Average adjusted transaction volumes continued their week-on-week rise from an average daily total of $1.71B to $2.07B. We expect this trend to continue as the launch of several new Bitcoin derivatives products in the last week acts as the key driver for on-chain volume — BTC ($1.66B), ETH ($186M), XRP ($69.3M), BCH ($12.5M), and LTC ($23.5M).

News - Both CME and Binance-backed Derivatives Exchange FTX Launch Bitcoin Options | The Block

What happened?

Chicago-based derivatives exchange CME Group kicked off trading for its bitcoin options contract on Monday by trouncing its rival, the Intercontinental Exchange-owned Bakkt. CME Group has traded 55 contracts, worth about 275 bitcoin or $2.1M.

In addition, Cryptocurrency derivatives exchange FTX, in which Binance acquired an equity stake recently, has launched its own bitcoin options contract. The options, currently unavailable to U.S. users, went live on Sunday, said FTX, adding that some features such as limit order are yet to be implemented.

FTX's and CME's bitcoin options are cash-settled to U.S. dollars (USD). Sam Bankman-Fried, founder and CEO of FTX, tweeted that the options hit $1 million of volume within two hours of their launch, while in the first 12 hours, it traded about 2,000 contracts.

What does this matter?

CME and FTX show both sides of the crypto asset derivatives market. On one end, CME's bitcoin options contracts exist within a regulated framework similar to their cash-settled futures and may be better suited for a more-institutional kind of investor with less experience with the crypto asset industry's microstructure. On the other hand, FTX largely exists within an unregulated framework and is preferred by likely primarily other quantitative funds, market makers, as well as sophisticated retail investors.

The fact that both sides of the spectrum have decided to launch bitcoin options goes to show the industry's sentiment to the potential margins still available within the crypto asset derivatives market. Currently, as the chart below shows, the bitcoin options market is dominated by Deribit — which recently was reported to have had a funding round at a "nine-figure valuation", according to the Block. However, volumes for bitcoin options currently pale in comparison to futures and perpetual swaps.

As our market outlook argued, it is likely that the Bitcoin options market could be significantly larger by the end of the year as other exchanges decide to enter the market — as they did for futures in 2019.

Learn more here.

News - NBA's Spencer Dinwiddie Set to Roll Out Tokenized Investment Platform | The Block

What happened?

Brooklyn Nets player Spencer Dinwiddie said this week that his tokenized investment vehicle will launch on Jan. 13 in spite of the NBA’s threat to ban him from the professional basketball league. “The Spencer Dinwiddie bond launches January 13th. I’ll also be taking 8 fans to ASW with me. #NBAVote,” he tweeted on Jan. 10.

The bond will be issued with the help of security token platform Securitize, whose CEO Carlos Domingo tweeted the partnership on Twitter. "First bond being managed by a digital transfer agent operating on the Ethereum Blockchain," Domingo said of the deal in a message to The Block

Why does this matter?

An early promise of Ethereum and other smart contract platforms has been the ability for a variety of once-uncapturable financial value to be finally able to be captured through the use of tokenization. In reality, often legal issues surrounding tokenization have often stifled other comparable tokenization efforts — in fact, Spencer Dinwiddie's efforts have faced issues as well due to the NBA claiming that the tokenization platform would constitute a breach of the NBA players' collective-bargaining agreement.

As of today, it is unclear whether the investment vehicle has actually been launched as the NBA was reported to still be reviewing his revised plan. The NBA said in a statement: "Spencer Dinwiddie’s advisers provided us with new information regarding a modified version of their digital token idea, which we are reviewing to determine whether the updated idea is permissible under league rules."

Learn more here.

News - Former Bakkt CEO Kelly Loeffler to Help Oversee CFTC, Raising a Possible Conflict of Interest | The Block

What happened?

Kelly Loeffler, former CEO of bitcoin derivatives exchange Bakkt and a newly-appointed U.S. Senator, has joined the committee that oversees the Commodity Futures Trading Commission (CFTC). Loeffler has joined the Senate Agricultural Committee, which has jurisdiction over the CFTC.

Loeffler’s appointment to the committee raises concerns about a possible conflict of interest. Her husband, Jeffrey Sprecher, is the founder, chairman, and CEO of Intercontinental Exchange (ICE), which is regulated by the CFTC. “I have worked hard to comply with both the letter and the spirit of the Senate’s ethics rules and will continue to do so every day,” Loeffler told the Wall Street Journal, adding: “I will recuse myself if needed on a case by case basis.”

Why does this matter?

The appointment of former Bakkt CEO Kelly Loeffler to the U.S. senate was unexpected, to say the least. However, more importantly, it brings up important conflict-of-interest questions given Loffler's close ties to ICE and Bakkt, both of which are at least partially under the purview of the CFTC. It's interesting to consider what impact this may have on CFTC regulation which may affect the crypto asset industry going forward.

It is likely that Loeffler will recuse herself from such regulation and conversations due to the obvious conflict, but the appointment is indicative of the CFTC's relatively appreciative stance on the industry. For example, the chairman of the CFTC was quoted as saying that crypto derivatives "[are] helping to legitimize [crypto assets], in my view, and add liquidity to these markets".

Read more here.