As digital assets become more popular in the modern economy, the derivatives world is beginning to take notice.
The types of these assets include images, video, music, written content, data, cryptocurrencies, and even the once highly-viral NFT. Since digital assets possess value, trading derivatives of them on global markets provides a new opportunity for investors.
Let’s examine the recent growth of the derivatives trading market to include products referencing digital assets. FinTech companies and tech businesses providing them IT services need to be aware of this new type of derivative. The rapid growth of this market requires these organizations to pay close attention to the myriad opportunities.
How Are Derivatives Going Digital?
The Growth of Derivatives Referencing Digital Assets
The increasing number of tradable derivatives involving digital assets highlights the growth of this emerging financial market. In 2017, regulated American exchanges first allowed the trading of Bitcoin futures, bootstrapping this growing trend. Currently, nearly 20 futures commission merchants (FCM) offer derivatives made up of a variety of digital assets.
Even traditional financial services companies now offer derivatives based on cryptocurrencies, like Bitcoin and Ethereum. Goldman Sachs provides an example of one of these veteran financial institutions embracing digital derivatives trading. However, fewer regulations on global exchanges results in an even higher foreign popularity for trading digital asset derivatives.
Institutional crypto derivative funds enjoyed $29 billion of inflow in 2022. Notably, that amount dropped to nearly $8 billion the following year, largely due to external factors. However, this market continues to rebound and is forecast for growth throughout the rest of this decade.
Factors Influencing Trading Digital Asset Derivatives
Various innovations and other factors help drive the growth of digital asset derivatives. One of these innovations is Decentralized Finance (DeFi), which leverages distributed ledger or blockchain technology for trading. Tech companies with experience in blockchain need to explore opportunities with FinTech firms looking for help with digital derivatives.
Regulatory compliance also needs to be considered for FinTech institutions involved with digital asset derivatives. Regulators largely place these types of derivatives within existing legal frameworks. However, this approach differs depending on the location of the market exchange. Not surprisingly, American-based regulators tend to prohibit derivatives from foreign exchanges with a less stringent framework as the U.S.
FinTech companies looking for new product development opportunities need to explore supporting the burgeoning market for digital asset derivatives.
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