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Crypto market has been under intimidation with the majority of tokens in the cryptosphere witnessing a price slump, since earlier this month. Bitcoin underwent a flash crash and shed a lot of blood to fall below the price level of $50k. Notably, the asset’s plunge had an impact on the entire market, as the phenomenon was witnessed among the majority of the crypto tokens as the market gradually painted with blood. However, the major assets in the market also have a healthy futures and options market that could have played a significant role in foreseeing the ongoing price slump for these assets.
Spot and derivative market prices are closely related
According to Luuk Strijers, the chief commercial officer of crypto derivatives exchange Derbit, before this weekend’s correction we saw spikes in IVs. Indeed, the indications were possibly related to post expiry related selling. There seems to be some FUD in the market and Strijers’ team saw Risk-reversal strategies being traded.
Furthermore, Strijers explained that the impact of this particular expiry on Bitcoin, seems difficult to tell for certain. However, most of the investors watch the expiry and open interest levels at certain key strikes which amplifies the relevance of the larger expiries.
Simultaneously, Aadam James, senior analyst at OKEx Insights, said the most obvious signs that a crash may be impending were the extremely high open interest and positive funding. Indeed, those two indications don’t generally bode well and often require flush. Moreover, James explained that the cascading sell-off we saw on Saturday was just that flush, thin weekend order books made it easy to steamroll overleveraged longs and cause something of an Open Interest reset. Following which the crash was one of the largest capitulating events in Bitcoin’s history.
Institutional investors can change the game
Observing the derivative’s market that exists for the top two crypto tokens, we have noted that it is a very minimal percentage of the spot markets, though with significant growth in open interest. Moreover, the OI for the flagship cryptocurrency options has grown more than tenfold from nearly $1 billion in July which has surged by more than $10 billion.
The total market cap in the spot markets in the same duration was more than $1 trillion. Indeed, the factor is highly evident that crypto options are only in their nascent stages. Still the factor plays a significant role in price forecasting for the asset. Notably, a similar phenomenon has been noted while observing other crypto assets like Ethereum.
Institutional players could here be the game changers, as they have the potential to enable drastic change in the digital asset derivatives market. Indeed, these investors can exponentially increase the size, liquidity, and depth of the crypto derivative market.
According to Strijers, large institutions have an extensive platform and a due diligence procedure as well. Especially the ones offering third party asset management in some form. Which is similar to the multi billion dollar macro funds.
