Crypto Derivatives Market: Trends, Valuation, and Risk (EY)

Summary

• The monthly crypto derivatives trading volume reached US$1.33 trillion as of September 2023, significantly recovering from under US$100 billion in January 2019.p.3
• The non-US market generated over 95% of total global monthly derivative trading volume as of September 2023, with the top three exchanges controlling an 84.7% market share.p.3
• The US market represented less than 5% of monthly crypto derivative trading volume as of September 2023, where CME held over a 60% market share.p.3
• In the decentralized derivatives sector, dYdX dominated perpetual swaps with $8.30 billion in monthly trading volume in September 2023.p.3
• Research highlights that crypto futures carry can reach 60% per annum, driven by leverage-seeking retail investors and limited arbitrage capital.p.6

Key insights

1. Crypto derivatives monthly trading volume reached US$1.33 trillion in September 2023, nearly four times the size of the crypto spot market.p.3
2. Global crypto derivatives trading is heavily concentrated outside the US, which accounts for over 95% of total monthly trading volume.p.3
3. CME dominates the US crypto derivatives landscape with a market share exceeding 60% as of September 2023.p.3
4. Crypto option implied volatility surfaces display a severe positive skew with a heavy right tail, contrasting sharply with traditional equity and FX options.p.5
5. Options for thinly traded crypto assets are typically proxied against liquid ETH implied volatility surfaces using historical price return correlations.p.6
6. Perpetual swaps use an eight-hour funding rate mechanism to align contract pricing directly with underlying spot market prices.p.7
7. Novel crypto derivatives are expanding to address specific sector needs, including Bitcoin Hashprice NDFs for miners and staking yield swaps for ETH stakers.p.8
8. Risk modeling for crypto derivatives requires specific adaptations for 24/7 continuous trading, severe volatility, and unstandardized legal netting frameworks.p.10