Regulated marketplaces and traditional market participants are busy trying to grasp their new reality, as institutional investors add cryptocurrencies to their portfolios while prices rocket. Position liquidations alone can turn over billions of dollars per day.
Asset managers may gasp at the price volatility (which can easily be in tens of percent on a day) or discuss the lack of an underlying tangible value. Yet, from a post-trade perspective one thing can be said for a fact: The stuff is being traded, at exploding volumes, both in spot and future markets – generating a new market for services.
The monthly global trade in bitcoin futures in January reached 2,1 trillion USD, according to data compiled by The Block. Derivatives exchange operator CME is now regularly seeing future trading on over 50,000 bitcoin a day, putting daily values in billions of dollars at today’s price of around 50,000 USD/bitcoin. CME’s bitcoin futures product was put up in late 2017. Futures in another cryptocurrency, ethereum, were launched by CME recently, on 9 February.
Said to have low price correlation
In an article on CME’s own blog Open Markets, published earlier in February, industry senior Jack Bouroudjian seeks the drivers of institutional interest in crypto. One factor is its relatively low price correlation with other asset classes, and could be perceived as a hedge against inflation risk.
The bitcoin price quadrupled in 2020, and has almost doubled once more in this year so far. Many got rich but new investors easily overexpose themselves to the volatility. On 22 February, crypto site The Block shared indications that derivatives positions worth 1.5 billion USD had been liquidated by force within the 24 hours alone on the world’s crypto exchanges, pushing the price from around 58,500 to 54,000 USD.
Market cap hits trillions of dollars
On Monday, the total market capitalisation of bitcoin corresponded to 1,600 billion USD.
Traditional custody banks as well as native digital upcomers are competing to become the trusted guardians for the digitally tokenized holdings of institutional investors in the future. The custody model for cryptocurrencies like bitcoin could translate to digital tokens that increasingly represent traditional underlying assets, whose digitalisation make them cheaper and safer to exchange and service.