In the year 2024 will be the year crypto investors get sophisticated with derivatives.
During the 2017 bull run, initial coin offerings (ICOs) were all the rage. The last bull market – in 2021 – was dominated by the development of decentralized finance (DeFi) and production. Now, as the hot bull cycle gathers pace, 2024 will bring more sophisticated financial products on the chain. From complex derivatives to structured products, big-boy instruments and traders enter the digital-asset playing field.
As we have seen in previous cycles, the crypto ecosystem tends to closely follow the traditional financial (TradFi) market. After all, Bitcoin (BTC) was originally developed as an alternative payment system. ICOs take their name from TradFi's first public offerings (IPOs) in 1783.
Meanwhile, the DeFi ecosystem looks like traditional financial services like lending, borrowing, and product generation are only decentralized. So it seems only natural that more sophisticated financial vehicles could eventually lead to a Web3 revolution.
Related: Futures Will Be the Best Crypto Game in Town After Bitcoin Spot ETF
We have already seen a remarkable growth in the crypto derivatives market. Transaction volume rose 37.3% to $2.58 trillion in November, the highest since March, although their share of the overall crypto market fell to 73.3% from 79.9% in September. At the same time, open demand for crypto options is hitting new all-time highs.
Alongside this healthy recovery, we are seeing more sophisticated derivatives such as decentralized sustainable futures trading and new risk management methods. As we head into the new year, this will be a key area for innovation, and we'll also see the launch of new sophisticated products that mimic traditional counterparts.
In particular, in the crypto space we see growth in options, structured products and linked debt obligations (CDOs). While we've seen some attempts at crypto CDOs – notably from Opium Finance in 2021 – the market for crypto-structured products is quietly gaining steam.
However, these complex products are still a small fraction of the overall crypto market. For example, on-chain products make up only 0.21% of the total market value of crypto, which opens up a huge potential for expansion.
So what is driving the demand for these innovative products? I see three key drivers of this trend in 2024 and beyond. First, growing institutional interest in digital assets naturally spurs interest and innovation in this space. The market for traditional derivatives is estimated to be worth 10 times the world's gross domestic product (GDP), which is available for every conceivable asset. As sophisticated traders stack up, the crypto derivatives market sees a similar surge in growth.
Second, as crypto winter-induced nerves subside, investors will once again seek outsized returns on their digital assets. But at this time, we can expect less interest in farming as there is a high threat of hijacking. Instead, focus shifts to derivatives and structured products. Often offering sky-high returns of over 100%, these complex products offer something agriculture doesn't: downside protection. And this brings us to our final point.
After the failure of Terra, Celsius, FTX and others. In the year In 2022, war-torn investors are looking for assurances that their assets won't just go up in smoke. This makes products with capital protection level attractive. Complex financial vehicles such as structured products often offer capital protection, some – such as the so-called “shark fin” structure – even paying a guaranteed coupon.
Related: BONK, PEPE and SHIB are threats to crypto.
Structured products essentially allow investors to make an educated guess on the future direction of travel for their chosen underlying asset – in crypto, this could be Bitcoin. With shark fin production, guessing correctly can result in handsome returns. But even if the guess is wrong, the investor still gets his money back and walks away with a small coupon. The only catch is that the currency can be converted to the underlying asset – such as Tether (USDT) to Bitcoin – at an unfavorable price. But this is a much less bitter pill to swallow than the risk of liquidation on a production farm.
This built-in protection made structured products so popular in the traditional financial markets, at least before the financial crisis destroyed confidence in complex investment vehicles. In the year When launched in the 1990s, their goal was to provide investors with tailored risk-return outcomes, making them suitable for many portfolios—and they did.
As the crypto market matures and the focus shifts to predictable returns in diversified portfolios, these vehicles will get another moment in the sun. In the year In a market still reeling from the events of 2022, capital preservation has become increasingly important for many investors, especially as crypto climbs into the mainstream. Demand always drives innovation, so we expect to see new initiatives in the structured manufacturing space on the chain, as well as new complex derivative projects, with rapid growth in assets in these areas. This is one of the innovations of the current bull run.
Lucas Kiely is the Chief Investment Officer of the Product Application, where he oversees investment portfolio allocation and leads the expansion of the diversified investment product range. He was previously Chief Investment Officer at Diginex Asset Management, and was Senior Trader and Managing Director, QIS and managed the structured derivatives business at Credit Suisse in Hong Kong. He was Head of Special Derivatives at UBS in Australia.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
