Why crypto derivatives are ‘somewhat misunderstood’
Derivatives derive their value from an underlying asset. Crypto derivatives including futures, options, and perpetual swaps have garnered a lot of interest in recent years.
In an interview with Forbes, FTX CEO Sam Bankman-Fried (SBF) put forward his thoughts on “misunderstood” derivatives.
“Crypto derivatives are a ‘somewhat misunderstood’ area,” Bankman-Fried told Forbes. “People will note that derivatives trade more volume in crypto than spot, which is true. But that is true of every asset class in the world.”
He further noted that “derivatives make markets more efficient by adding liquidity for traders who want crypto price exposure, but who don’t need actual token delivery.” Having said that, it involves some risks as well. The same was acknowledged in the interview. SBF stated,
“…derivatives like crypto futures do sometimes go wrong – such as when leveraged positions lead to forced liquidations. But these sorts of scenarios are over-emphasized and are generally less important than the broader beneficial effects of having access to futures.”
For instance, Early in March, the market correction then led to excessive leverage, driving a record $500 million worth of long liquidations over an hour.
In the last hour alone, nearly $500M in #Bitcoin Longs got liquidated, this is a historic ATH.
There is excess greed in the system, with 60% of contracts levered 20x or more.
Long liquidations are an artifact of the current bull market. pic.twitter.com/n9NciJcS62
— Yann & Jan (@Negentropic_) March 15, 2021
In addition to this, SBF, in a series of tweets, announced the reduction on the leverage available to traders on his FTX exchange from 101x down to 20x. The move was intended to “encourage responsible trading.” He reiterated the same in the interview,
“Any position that you’re putting on with that level of leverage can’t be absolutely crucial for efficient markets, and this is not something I felt was particularly important or good for crypto market health.”
SBF also spoke about long-awaited clarity in crypto regulations. “I just wish that the industry were, as a whole, doing a more conscientious job of interfacing with regulators,” he said.