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2024 May be the Year Cryptocurrency Investors Become More Savvy with Derivatives

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2024 may see a rise in the profitability of exotic options, structured products, and collateralized debt obligations as trading platforms for cryptocurrencies.

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Initial coin offerings, or ICOs, were all the rage during the 2017 bull run. In the most recent bull market (2021), yield farming and the expansion of decentralized finance (DeFi) took center stage. A new bull cycle is now gaining momentum, and 2024 will see the introduction of a wider range of more advanced financial instruments. The realm of digital assets will be explored by traders and big-boy instruments, ranging from intricate derivatives to structured products.

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The crypto ecosystem frequently tracks the traditional financial (TradFi) industry, as seen by past cycles. Ultimately, Bitcoin was initially intended to be a different kind of payment. Even the term “ICO” was taken from TradFi’s 1783 original public offerings (IPOs).

In the meantime, typical financial services like lending, borrowing, and yield creation are modeled by the DeFi ecosystem, albeit in a decentralized way. Thus, it makes sense that increasingly sophisticated financial Web3 instruments would eventually evolve.

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Impressive expansion in the cryptocurrency derivatives sector is very evident and heating up. Derivatives trading volumes increased 37.3% month over month in November to $2.58 trillion, the biggest level since March. However, their proportion of the total cryptocurrency market fell from 79.9% in September to 73.3%. Open interest in cryptocurrency options has been rising at the same time to record highs.

Monthly spot volume compared to monthly derivatives volume. Source: CCData

More complex derivative products, like the emergence of decentralized perpetual futures trading and creative risk management techniques, are emerging concurrently with this positive rebound. As we approach the new year, this will be a major area for innovation. In addition, more sophisticated items that imitate their old counterparts will be introduced.

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We anticipate growth in the cryptocurrency market, namely in exotic options, structured instruments, and collateralized debt obligations (CDOs). While the market for crypto structured products is gradually picking up momentum, there have been previous attempts at cryptocurrency CDOs, most notably from Opium Finance back in 2021.

These intricate items still make up a very small portion of the cryptocurrency business as a whole, though. For instance, only 0.21% of the overall market capitalization of cryptocurrencies is made up of on-chain structured goods, providing room for substantial growth.

DeFi protocols that offer on-chain structured products, ranked by time-value locked. Source: CCData

What then will pique people’s interest in these cutting-edge derivative products? In 2024 and beyond, I see three major forces driving this development. First, demand and innovation in this field will inevitably be driven by the increased interest of institutions in digital assets. With derivatives available for almost any asset imaginable, the traditional derivatives market is estimated to be worth ten times the global gross domestic product (GDP). Similar growing momentum will be seen in the cryptocurrency derivatives market as savvy traders join in.

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Investors will resume searching for huge gains on their digital assets once the anxiety brought on by the crypto winter wears off. But because there is a greater chance of hackers this time, we should anticipate less enthusiasm in yield farming. Rather, the focus will shift to structured goods and derivatives. These complicated instruments, which frequently promise returns above 100% APY, have one advantage over yield farming: downside protection. And with that, we arrive at our final point.

In essence, structured products let investors predict with some degree of accuracy where their selected underlying asset—Bitcoin, for example—will end up in the future. If you predict right with a Shark Fin product, you may win a lot of money. However, in the event that the guess is incorrect, the investor still receives his money back and leaves with a little coupon. The sole drawback is that his funds might be exchanged for the underlying asset at a negative rate, such as Tether to Bitcoin. However, this is a considerably easier pill to chew than yield farming’s liquidation risk, for example.

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At least until the financial crisis completely destroyed faith in sophisticated investment vehicles, structured products’ inherent security is precisely what made them so well-liked in the traditional financial market. They were a big hit when they were first introduced in the 1990s because they were designed to give investors customized risk-return outcomes that could be used with a variety of portfolios.

These vehicles will have more of an opportunity as the cryptocurrency market develops and attention turns to more consistent returns inside diversified portfolio arrangements. Capital preservation has become increasingly vital for many investors in a market still suffering from the events of 2022, especially as cryptocurrency becomes more widely accepted. Since demand is the primary driver of innovation, we anticipate seeing more sophisticated derivatives projects and new product launches in the on-chain structured product market, which will accelerate the expansion of assets in these sectors. One of the key inventions of the present boom will be this.CRYPTOCASTER® - DECENTRALIZED FREEDOM!


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