Cryptocurrency exchanges rushed to fill the void left by FTX as cash markets contracted and faced liquidity shortages.
FTX's failure has given other exchanges the opportunity to gain market share or take over the world's largest crypto exchange, which is now controlled by Binance. Some exchanges are showing interest in buying FTX derivatives platforms in the US, while others simply want to create new derivatives exchanges. Meanwhile, the disappearance of several crypto lenders like Genesis has forced traders to look for other ways to improve their position.
"There is a distinct void in the legacy software market, especially for regulated entities," said Tarun Chitra, partner at cryptocurrency venture fund Robot Ventures. "We've seen many companies move toward centralization and decentralization to fill this gap."
After the bankruptcy of lenders like Genesis and Voyager Digital, derivatives platforms were one of the few remaining places for traders, especially institutional trading malls, to grow their cryptocurrency trading business. David Martin, head of institutional coverage at digital asset broker FalconX, said institutions choose products like futures and options to hedge trades because they "allow them to have short-term exposure, speak their minds and protect portfolios."
Data collected by CryptoCompare shows that by January 2022, derivatives will account for more than 60% of total trading volume, including spot, on all crypto exchanges.
He added that for hedge funds that primarily trade on US exchanges such as the CME, cash-settled futures contracts also preclude using cryptocurrencies as hedges.
Some offshore derivatives exchanges offer a maximum of 100x for some cryptocurrencies, such as Binance, which later said it had reduced the maximum leverage users could use to trade futures contracts from 100x to 20x.
The rise of the crypto industry has opened up a lot of opportunities in the market because FTX doesn't have a direct market share at the moment and creating new things in the space is definitely not a problem for them," said Antonio: Giuliano, founder and CEO of decentralized exchange dYdX, in an interview.
Peers such as dYdX and GMX were both direct beneficiaries of the FTX boom in November, and trading volumes immediately increased.
Now that FTX is no more, exchanges like Blockchain.com and Gemini are showing interest in buying LedgerX FTX, which is registered as a derivatives exchange with the US Commodity Futures Trading Commission. Meanwhile, one of the biggest cryptocurrency market makers, Wintermuth, recently said it is "seriously" considering launching an exchange for professional traders. And the former head of Jefferies Finance launched a new cryptocurrency exchange that will eventually expand into derivatives. All this comes as Binance derivatives trading is pending in Australia.
For crypto exchanges looking to diversify their revenue streams, the expansion of institutionally based derivatives can help them weather bear markets. Many exchanges primarily rely on transaction fees set by retailers to trade on the spot, especially since interest in crypto has waned since FTX.
The recent Bitcoin price rally has improved results. The world's largest digital asset is facing a $30,000 market cap after rising nearly 25% since March 8 following the collapse of Silicon Valley Bank.
Derivatives allow traders to take advantage of market volatility by managing risk in unexpected market conditions. According to Luke Striders, CEO of DeriBit Exchange, which recently announced plans to launch a futures contract to facilitate bitcoin volatility trading, many investors are looking to enter the derivatives market amid price volatility.
"As the market deviates, we see volume decrease," Stringer said. “But when the market moves... up or down. That's when people tend to look for alternatives and of course we take advantage of that."