Menu Close

Is there any hope that DapperLabs: derivatives are flooding the Bitcoin bull market?

axie infinity

Recently, the stock market is relatively hot (basically everyone in the currency circle is investing in stocks when writing this article, of course, today), but the activity of the currency circle has gone from bad to worse. I believe most people still remember the dreary narrow concussion of the currency circle from May to June. At one point, the volatility was less than 3% a week.

The chart below shows that BTC’s ATR (true volatility) index hit a two-year low. Fortunately, there has been some movement in the market this week, with gains such as ETH gratifying.

In the past two months, low volatility and low trading volume have become the main characteristics of the market. This makes many participants uncomfortable, although the absolute price of Bitcoin is not low, but there is no fluctuation, there is no opportunity to make money, and many people even think that Bitcoin has entered a “bear market”. The status quo is that speculators in the currency circle are staring at contracts, trying to take money out of other pockets. Over the past two years, digital currency contracts have been flooded and exchanges abound. I think the long-term impact of derivatives on currency prices is worth discussing.

Whether the mainstream currencies represented by Bitcoin will fall into low volatility for a long time, and explore the underlying causes and influencing variables.

According to the overseas third-party consulting firm I have, the spot transaction volume of Bitcoin is less than $500 million a day. On the other hand, according to the trading volume data released by the contract exchange, the total daily turnover of active exchanges such as Yuan an, Fire Coin and BitMex,BitCoke,FTX is at least more than 5 billion US dollars. Compared with the unpopular spot market, the active derivatives market amplifies the wealth effect and is clearly more popular with speculators.

However, this is also a normal phenomenon, and the trading volume in the derivatives market of other financial assets is also much larger than that in the spot market. For example, the daily turnover of domestic rebar futures is often 20-30 billion, but the activity of rebar has fluctuated very well. at least I don’t remember a two-month “rogue” trader like Bitcoin.

The idea that currency prices have been kidnapped by derivatives is popular, but many people disagree.

For example, PlanB, a well-known encryption analyst, believes that derivatives will not affect the price of bitcoin. According to the Stock-to-flow model, after the Chicago Mercantile Exchange listed its first contract products in December 2017, it attracted institutional investors, but did not change the mode of operation and forecast price of Bitcoin.

Others cite the stock market as an example, claiming that the trading volume of futures and options in US stocks is also huge, but it does not affect the ten-year unilateral bull market of S & P and Nasdaq.

I don’t think we can simply use the derivatives logic of stocks, bonds or commodities to understand the derivatives of digital currencies. Taking stock index futures as an example, there are great differences in product design, trading structure, participants, underlying asset pricing model and digital currency derivatives.

Stock index futures are generally centralized trading, liquidity is concentrated in an exchange matchmaking. On the other hand, there are many currency circle contract exchanges, and their liquidity is isolated from each other.

The underlying asset of stock index futures is the stock index. The arbitrage mechanism of index ETF enables the excessive deviation of the underlying asset price to be corrected quickly. The perpetual contract of currency circle can keep up with the spot price under the exquisite “capital rate” mechanism, but the arbitrage mechanism of spot and derivatives is not perfect, and the correlation and function between futures and cash is completely different from the traditional financial asset model.

The leverage of stock index futures is fixed, with the limit of opening quota and the reporting system of seats and positions. The digital currency contract leverage is flexible and adjustable, users can bet on the direction of 1 times, but also can bet 100 times the direction.

The stock index is composed of constituent stocks, which belongs to “public goods”. The number of investors participating in stocks is in the majority, and the types and purposes of investors are rich and diversified. No one can control the direction of the trend. Generally speaking, the speculators in the currency circle are basically for the purpose of trading spreads and lack the ability to identify and discover the value.

Because of the highly mature and perfect mechanism of the securities market, it is generally believed that derivatives such as stock index futures can greatly improve market efficiency, that is, stocks and other financial assets can reflect new information more accurately and more quickly. give full play to the function of market price discovery and resource allocation. And stock index futures and options also provide institutional investors with a very important risk management tool to optimize portfolio strategies.

Passive investment represented by ETF has rapidly engulfed the asset management industry in recent years, indicating that the traditional securities and bond markets are highly mature and efficient, and it is more difficult to obtain excess returns.

Passive investment represented by ETF has rapidly engulfed the asset management industry in recent years, indicating that the traditional securities and bond markets are highly mature and efficient, and it is more difficult to obtain excess returns.

Passive investment represented by ETF has rapidly engulfed the asset management industry in recent years, indicating that the traditional securities and bond markets are highly mature and efficient, and it is more difficult to obtain excess returns.

Bitcoin is more like precious metal.

From the perspective of monetary function extended by commodity attributes, gold is the monetary equivalent most similar to bitcoin in the real world.

Nowadays, gold not only has a rich spot market, but also its futures trading plays an important role in commodity futures. Analyzing the price change law of gold with reference to the formation and development of gold derivatives may bring some enlightenment to the evolution of digital currency.

At the beginning of gold is mainly spot, banks, ticket numbers, pawnshops and other spot over-the-counter transactions accounted for the vast majority of gold turnover. In the 1970s, the US dollar was decoupled from gold, and the capitalist world entered the era of credit and monetary system. Under the wave of financial liberalization in Europe and the United States in 1980 and 1990s, financial controls were relaxed, all kinds of financial innovations were popular, and derivatives trading exploded.

However, from the trend chart of gold, we find that the theme of gold’s past two bull markets is that there is a strong theme of the times. For example, after the decoupling of the fixed exchange rate system of one ounce of gold / 35 US dollars, the US dollar implements a floating exchange rate system against gold and national currencies, in which case the artificially suppressed price of gold / legal currency erupts upward like a runaway horse.

In the 1980s and 1990s, when derivatives really developed rapidly, the price of gold, the monetary equivalent of the real world, fluctuated between $200 and $500. it did not improve for more than 20 years, until the economy took off after China’s accession to the WTO, and the driven demand for commodities contributed to the second round of the bull market in the first decade of the 21st century (plus low interest rates by the Federal Reserve).

If the history of gold can give us any enlightenment, it is that the change in the theme of fundamentals is the main source of the general trend.

We have seen big fluctuations in the currency circle in the past two years.

Take Bitcoin as an example, 17 years of ICO has driven the entire digital currency from the community to the masses. The bull market was similar to the dotcom bubble in 2000. People were always optimistic that new technologies would change their lives and society in the short term. Financial markets were frenzied and prices rose unsustainably, causing a crash. At the end of 18, after the BTC crash, it fell to $3200 by the end of the year, down nearly 80%, while in 1919 Bitcoin was hyped to $13500 under the banner of “safe haven assets”, a nearly threefold increase. At the beginning of this year, there was a brilliant wave of hype about the concept of halving in currencies such as BSV and ETC, while bitcoin rose less.

The popularity of digital money has been increasing, and it is no longer the exclusive plaything of programmers. Institutional investors in Europe and the United States continue to increase their acceptance of digital currencies represented by BTC and ETH, and digital currencies have also gained a place in the investment portfolios of online elites, community KOL and Open-minded. With more and more investors accepting mainstream digital currencies such as BTC and ETH, the application of payment has gradually landed, and there are more and more factors affecting the prices of mainstream currencies. BTC, ETH and other large market capitalization currencies are less and less likely to be manipulated. Other small-cap digital currencies can still be manipulated. There is a good chance that volatility, like commodities, will gradually decline in the future. In other words, even if the price trend is upward, the price trajectory that has been frantically pulled up for a few days should not appear again, and after that, the market will last longer and the range of daily price highs and lows will be smaller.

2019 is the year of the popularity of digital currency derivatives, the emergence of a large number of contract exchanges, the launch of perpetual contracts, USDT contracts, contract insurance, options and other products. Derivatives give investors a greater risk-return ratio, and the speed and scale of changing hands of wealth spurred by leverage are accelerating. According to the TokenInsight Derivatives Trading report 2019, the annual trading volume of derivatives was $3,000bn in 2019, much higher than in 2018. The average daily derivatives trading volume is $8.5 billion, accounting for 20 per cent of the annual spot trading volume.

To sum up, as a market with a rapid increase in popularity but insufficient trading volume in the spot market and a large number of “fragmented” derivatives, digital money cannot continue to fluctuate all the year round. Derivatives bring faster changes of wealth than spot ones. Taking into account transaction costs, wear and tear and other factors, on the whole, most people should be at a loss. Long-term prospect.

From the point of view of the development of the industry, after 17 years of digital currency explosion, now in addition to USDT as a US dollar digital currency used in contract transactions, ash production and trade, ETH’s 2.0 public chain projects, blockchain applications in other industries are still scarce, and new users are not optimistic.

There is no new story vision, no belief in the unity of the large capital portfolio, all digital currencies (Bitcoin mainstream coin, shanzhai coin, Taiwan coin, etc.) fluctuate in the same direction is lack of driving force, the future digital currency will be like stocks, pay more attention to the development and application of fundamentals.

For example, under the background that unlimited QE makes paper money close to waste paper, the currency storage, privacy and decentralized attributes of BTC will be re-recognized, and the price trend is still upward. The prospect of ETH, which has been doing things, will be more approved. after changing to the PoS mechanism, the inflation rate will drop, and the DeFi application can also be regarded as a real financial landing scenario, and ETH is more suitable to be regarded as a growth stock.

Leave a Reply