Cryptocurrency investment instruments are much more abundant than even some of the most ardent proponents could have imagined just a year ago. On the cusp of the impending entrance of institutions into the crypto markets, products from perpetual swaps offering high leverage to indexes covering lower-end altcoins, the market sophistication of crypto is maturing.
One exchange, FTX, has been making waves recently following the successful launch of their derivatives exchange and trading platform — supplemented by an $8 million funding round.
Born out of Alameda Research, a quantitative trading firm that manages over $100 million in assets, FTX is emerging as a formidable rival to the dominance of BitMEX, Deribit, and Huobi in crypto derivatives offerings.
Not only does Alameda Research’s prop-shop position among BitMEX’s leaderboard stir up controversy about potential conflicts of interest among FTX’s motivations, but it is also indicative of their market-making prowess and potential to vastly improving some of the crypto derivative deficiencies in the industry.
To understand why it is important to first address some of those limitations directly.
Problems With Crypto Derivatives Products
BitMEX is the undisputed leader of crypto derivatives, offering high-leverage perpetual swaps (which they basically introduced to the market) that attracts roughly $7 billion in volume per day. Additionally, BitMEX’s insurance fund has grown almost linearly, and currently sits at more than 30,800 BTC or roughly $367 million at current prices.
BitMEX’s position is currently tenuous from both a regulatory and competitive standpoint, however.
The order matching engine for the exchange has continually failed to meet demand, crashing too often, and causing costly problems for its users. Additionally, the CFTC is currently probing BitMEX for serving US customers, which led to record BTC outflows from the exchange in July following the announcement of the CFTC probe.
While BitMEX grapples with compliance concerns and order matching problems, competition has emerged.
For example, OKEx and Huobi Global already offer perpetual swap analogs to the Asian market, collectively counting for more than $2 billion in daily volume, and close on BitMEX’s heels. Similarly, both Binance and Bitfinex, two of the most popular crypto spot exchanges, are rolling out margin trading and derivatives products that will compete directly with BitMEX’s market share.
This is not to say that BitMEX cannot meet the emerging competition head-on though. The exchange still boasts supreme network effects in the derivatives market, is ideally located in Seychelles, a crypto-regulatory safe haven, and is in the process of completely overhauling its trading engine — which may retain traders in its ecosystem.
However, FTX may present the most daunting challenge to BitMEX’s dominance out of the materializing field.
The Onset and Potential of FTX
FTX is uniquely positioned to make noise in the crypto derivatives market for several reasons. And the sentiment around the exchange is already positive, which is likely priced into the current 50 percent ROI for the exchange’s native FTX token that was listed only a few days ago.
FTX is incorporated in Antigua and Barbuda but is targeting the Asian crypto market, which is rapidly becoming the leader in crypto products following myopic regulatory decisions by the US government. Combined with technical improvements that are based on insights gleaned from Alameda Research on BitMEX, FTX is boasting the type of infrastructure for a derivatives platform that institutions have been waiting for, and chiefly shied away from BitMEX for similar purposes.
For example, FTX cites their liquidation engine, a point of friction with BitMEX users, as minimizing the market impact by slowly closing over-leveraged positions. Additionally, the FTX OTC portal is powered by Alameda Research, which is both promising for settlement and low fees but also raises questions about their OTC desk’s attractiveness to institutions who view Alameda’s relationship with FTX as a conflict of interests.
In spite of that, FTX continues to roll forward.
FTX is actively engaging with its community, promising to roll out a “shitcoins” index of lower-cap altcoins along with a variety of fiat-altcoin and BTC-altcoin futures trading pairs. BTC and USDT are already accepted as collateral, which specifically regarding USDT, is a major boon for the Asian market.
For example, a recent piece by Coindesk highlighted how the OTC market for USDT in Asia, mainly China and Russia, is huge and is actually more accessible than the USD amid strict Chinese capital controls and an ongoing trade feud stoking fears of further quantitative easing. Combine the attractiveness of USDT collateral with three leveraged tokens for every underlying index, and 24-hour volumes already regularly exceeding $150 million, and FTX appears to be a potent improvement on existing derivatives products.
Unfortunately, FTX, among most other crypto derivatives exchanges, are unavailable to US investors and traders. Platforms like Bakkt, ErisX, and LedgerX are pegged to roll out regulated, physically-delivered BTC products over the coming months in the US, but regulatory scrutiny has continually delayed the process.
Unless the US platforms prove viable entry points for US institutions and easing regulatory scrutiny, we will likely see the proliferation and diversity of crypto derivatives products take place across the Pacific. FTX’s non-US customer policy is a microcosm for the ongoing struggle of US investors to access better crypto market instruments and comes amid a backdrop where the CFTC is probing BitMEX, which is based in a foreign country.
Asia appears poised to become the most liquid market for the future of cryptocurrencies, and FTX, Huobi, OKEx, Deribit, and BitMEX are all placing big bets on that trajectory.