Lynn Strongin Dodds provides a progress report on crypto derivatives and the impact of lighter regulation and heightened volatility since the beginning of the year.
Digital assets have been a hot topic for many years, but it is only fairly recently that there is more action than talk. Lighter regulation in the US and product innovation have made these assets more attractive which is why as of July, figures from CoinLaw show a record $8.94 trn in monthly volume, surpassing their spot trading counterpart .
Further data from CoinLaw reveals that the value of the overall crypto derivatives market is over $28 trn annually, making it one of the most active digital finance sectors. It currently represents around 76% of the total cryptocurrency trading volume, although Bitcoin and Ethereum derivatives still dominate the space, accounting for 68% of the total traded.
Demand for crypto derivatives has soared as investors seek to maximise gains during the current historic bull run in digital assets triggered by Donald Trump’s re-election in November. The president’s Working Group on Digital Asset Markets, which was established soon after he took office, has called on Congress to pass the Digital Asset Market Clarity Act to eliminate gaps in regulatory oversight by providing the Commodity Futures Trading Commission (CFTC) authority to “oversee spot markets for non-security digital assets” and measures that embrace decentralised finance technologies.
The working group has also recommended that that CFTC and Securities and Exchange Commission (SEC) join forces to develop a rulemaking process and using “their existing authorities to provide fulsome regulatory clarity.” The question of whether the CFTC or the SEC should be the primary regulator of digital assets has been the subject of years of debate and policy arguments.
The popularity of digital assets is not just down to a more amenable regulatory framework but as a way to mitigate risk and enhance liquidity due to recent market volatility and the ongoing geopolitical tensions in the Middle East and between Russia and Ukraine.
These instruments mirror traditional financial derivatives but are tailored to the volatility and 24/7 nature of crypto markets. They are bifurcated into centralised and decentralised with non-US markets leading in trading volume in the former. The latter, albeit slighter, is gaining traction for its security and transparency, with dYdX protocol being a major player in DeFi derivatives, according to a report from EY.
As for exchanges, figures from CoinLaw report unregulated Binance is at the forefront with $15.5 bn in daily trading volume followed by counterparts – Bybit and OKX f- with the much smaller amounts of $6 bn and $4.5 bn respectively. The regulated CME Group lags far behind on just $311 m daily.
However, there is growing demand for institutional-grade and focused venues, markets and technology infrastructure as digital asset trading volumes surge, according to a report by Crisil Coalition Greenwich – Digital asset trading 2025: A market in transition.
Author David Easthope, a senior analyst who heads up fintech research on the market structure and technology team at the consultancy, believes the market still has a way to go before it reaches full maturity. He notes that in order to access the full range of assets, institutions often need to participate in venues outside the US in places such as Dubai, Hong Kong or Gibraltar.
Historically, trading venues in the US have been careful to not list assets that were going to trigger regulatory scrutiny but given the Trump administration’s push for more adaptable rules, more nationally regulated venues are likely to emerge over time, similar to those in other jurisdictions. “Given that 44% of investors prefer regulated venues for cryptocurrency trading, we expect trading to move more in that direction as fast as venues can get assets listed, assuming they can offer sufficient liquidity,” says Easthope. “This virtuous cycle should create more competition as well as deeper and more liquid markets across a wider range of crypto assets.”
One of the most significant developments this year has been Coinbase’s launch of perpetual futures for trading Bitcoin and Ethereum. (https://www.coinbase.com/en-gb/blog/coming-july-21-us-perpetual-style-futures), These contracts, which were introduced almost ten years ago, are the favourite comprising 78% of total crypto derivatives trading volume.
They have been mainly traded on overseas exchanges and are typically employed by offshore investors to gain exposure to crypto without holding the digital assets directly and to add leverage that can be as high as 100 times. Unlike traditional futures contracts, the prices are adjusted every eight hours with no expiration dates, allowing them to track the spot-market prices closely.
The country’s largest US digital-asset exchange said its offering complies with regulatory standards outlined by the CFTC which includes limiting the maturities of its contracts to five years and capping leverage at 10 times. Although the amount allowed pales in comparison to what is offered on exchanges such as Binance and OKX, the increase from the two times permitted with CME Bitcoin futures – one of the few other actively traded CFTC-regulated crypto futures – is seen as a turning point.
The CFTC is also exploring whether to let some registered futures exchanges list leveraged digital assets like Ether and Bitcoin. The agency said this would be the first step in its recently crypto sprint initiative launched recently in line with the Working Group’s recommendations.
There has also been movement on the futures front which has seen contracts on Bitcoin and Ethereum jump 26% year-over-year on the back of strong speculative demand (CoinLaw data). The Crisil Coalition Greenwich report notes that CME and CBOE are expanding their reach into these markets and are no longer dwarfed by derivatives marketplaces like Deribit. These contracts, often used by both individual and institutional investors, enable leveraged trading, allowing traders to profit from anticipated price movements or hedge against market risks.
New product development has also been a feature this year especially in the crypto exchange traded product (ETP) sphere with the SEC’s recent decision to allow in kind creations and redemptions. Both spot bitcoin and ether ETPs were previously restricted to creations and redemptions on in-cash grounds. The changes will allow them to generate and reclaim shares on an in-kind basis, similar to other commodity-based ETPs.
Although the outlook looks bright for crypto derivatives, there are inherent risks including high volatility, leverage exposure, operational challenges and platform-related uncertainties. Additionally, the complexity of these instruments requires a deep understanding of market mechanics, liquidity, and regulatory environments.
However, as the Crisil Coalition Greenwich report points out, “the market is shifting toward a more robust and institutional-grade landscape, with firms like Bullish, LMAX Digital, Zodia, EDX Markets, Crossover, Coinbase, and Kraken providing upgraded venues, and BitGo, Galaxy Digital, Hidden Road, FalconX, and Coinbase building out prime brokerage operations.”
The report notes: “Custodians such as Etana, Anchorage, BitGo, and Copper also have aspirations to expand their institutional offerings to support the full trading life cycle, including in settlement and collateral movement. Moreover, “the emergence of full-stack prime brokerage operations will provide institutional traders a more comprehensive and coordinated approach to trading, custody and settlement and staking.”
