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As Crypto Derivatives Market Grows, Analysts Asses Their Impact On Prices

Fredrik Vold
Last updated: | 3 min read
Source: Adobe/eyeofpaul

The crypto derivatives market – such as the trading in perpetual futures and options contracts – has seen strong growth in recent years. But is this a healthy development for the cryptoasset space, and are there any causes for concern? 

The prevalence of crypto derivatives is something that has once again come to the forefront after a market correction this month. It was quickly blamed on overleveraged derivatives traders, given the massive amount of liquidations seen in a matter of a few hours.

Among the many in the community who brought up the issue was the popular bitcoin (BTC) on-chain analyst Willy Woo, who opined that the correction was “caused by deleveraging.” He added that just like during the COVID-related crash, “derivatives overreacted,” and said the market appeared “cheap” after the sell-off.

But Willy Woo is not the only one who has brought up the issue of derivatives in crypto markets over the years.

Reached for a comment on how industry insiders see the proliferation of futures and options trading on the crypto market, Luuk Strijers, Chief Commercial Officer (CCO) at derivatives exchange Deribit, told that while spot market activity remains “very important to determine the direction of any move,” activity in the derivatives market “often determine the magnitude” of the move. 

“[…] leverage and usage of derivatives as whole amplify moves in the underlying,” Strijers said, while noting that “this affects both directions,” as seen during the market correction in September. 

“Such a fall or healthy correction causes liquidations, again amplifying the downward move, causing a cascading effect,” the CCO added. 

And although it seems plausible that derivatives can often exacerbate price moves in the spot market, some analysts also claim that they can indeed determine market trends. 

“Derivatives with high volumes often dictate market trends,” said Hunain Naseer, a senior analyst at OKEx Insights, suggesting that derivatives traders with deep pockets can indeed move markets. 

However, the analyst also added that large-scale spot trading “can obviously” also make an impact, and that it is ultimately “a feedback loop” between spot and derivatives that drives market prices.


With their aura of complexity and sophistication, derivatives are a part of the market that triggers the feelings of some of BTC and crypto’s staunchest defenders. And with the original ethos of BTC being “uncensorable money” and “not your keys, not your bitcoin,” it makes sense that the proliferation of derivatives in the crypto market raises suspicions.

For instance, a commonly heard accusation among another group of unorthodox investors, namely gold and silver bugs, is that the “paper markets” for precious metals artificially manipulate the price of the physical metal. “Unlimited” amounts of futures contracts can be produced, it is said, despite the supply of physical metal being scarce, which should supposedly justify higher prices. 

And while it is true that futures contracts exist in unlimited quantities while the underlying asset does not, this concept is not exclusive to precious metals markets. In fact, all commodities markets trade in the same way, with only a tiny fraction of market participants actually intending to take physical delivery of the commodity.

Not surprisingly, the notion that derivatives manipulate prices of the underlying assets has resonated with parts of the crypto community.

For instance, observers have pointed to the fact that the bitcoin price peaked in 2017 on the same day as the Chicago Mercantile Exchange (CME) listed the first regulated futures contracts based on the cryptocurrency, which even the San Francisco Federal Reserve in a research paper said “does not appear to be a coincidence.”

For bitcoin and other cryptoassets, however, the situation still differs in that it is a new asset class, where only a “physical” spot market existed until relatively recently. Market participants will therefore have to wait and see how the two segments of the crypto market will develop and ultimately co-exist with each other.


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