2024 Crypto Trend: A Surge in Blockchain-based Complex Financial Products
Summary:
As we move into 2024, more complex financial products are harnessing the blockchain technology. Innovations in crypto derivatives are emerging, with trading volumes peaking at $2.58 trillion and open interest in crypto options setting new records. Complex financial instruments such as exotic options, structured products, and collateralized debt obligations (CDOs) are gaining traction within the crypto ecosystem. Institutional interest, investors' appetite for higher returns, and a new focus on capital protection are driving this trend. Despite their small current representation, these complex instruments suggest significant room for expansion.
In the 2017 cryptocurrency surge, the hottest trend was initial coin offerings (ICO). Fast forward to 2021, and it was all about the rise of decentralized finance (DeFi) and yield farming. As we step into 2024, however, we're seeing the emergence of more complex financial products on the blockchain. From intricate derivatives to structured commodities, heavyweight traders and instruments are setting foot in the digital asset marketplace.
With each surge, the crypto sphere aligns more with traditional finance. Bitcoin, after all, was conceptualized as an alternative to conventional payment systems. ICOs took their moniker from financial IPOs, an established practice since 1783. Moreover, DeFi has systematized traditional financial services like borrowing, lending, and yield creation in a decentralized format. Thus, introducing more sophisticated financial instruments in the Web3 format seems like the next logical step.
Recently, we've noticed a striking growth in the crypto derivatives sector. Trading volumes went up by 37.3% in November, peaking at $2.58 trillion—the highest since March, despite their share in the overall crypto market falling. Concurrently, open interest in crypto options is setting new records.
Alongside this robust growth, more advanced derivative products are appearing, including decentralized perpetual futures trading and inventive risk management techniques. These innovations will spark further growth as we transition into the new year, highlighting the introduction of new composite products resembling traditional ones.
There's a growing interest in complex financial products like exotic options, structured products, and collateralized debt obligations (CDOs) in the crypto universe. Attempts at crypto CDOs surfaced in 2021, and the market for crypto structured products is subtly gaining momentum. Yet, these complex constructs continue to represent a tiny slice of the crypto market, highlighting a vast scope for expansion.
So what's fueling this interest in innovative derivative products? Three factors appear to be driving this trend: rising institutional interest in digital assets, increased appetite among investors for higher returns as crypto winter fears wane, and a newfound focus on capital protection resulting from past mishaps.
The global derivatives market is vastly outsizing the GDP by an estimated factor of 10, with derivatives available for almost every conceivable asset. As more seasoned traders dive in, the crypto derivatives market is expected to grow at a similar pace.
As the trepidation from the crypto winter fades, investors start to seek massive returns. However, the risks associated with hacking may deter interest in yield farming. Instead, the focus is shifting to derivatives and structured products which not only promise lucrative returns but also provide capital protection - a feature absent in yield farming.
Structured financial products, particularly those that provide capital safety, are becoming increasingly attractive. Unlike in yield farming where investors risk liquidation, structured financial products often include capital protection and may even offer guaranteed returns.
These complex tools allow investors to speculate about the future of their selected asset - like Bitcoin. Correct speculation could result in significant returns. If wrong, investors still recover their initial investment with a small interest addition. The possibility of converting to the underlying asset at an unfavorable rate is preferred to yield farming's liquidation risk.
Structured financial products became immensely popular in conventional finance before the financial crisis eroded trust in them. Designed to offer customizable risk-return outcomes, they were ideal for a wide range of portfolios. As the crypto market matures towards predictable returns and diversified portfolios, these tools are set to regain their erstwhile popularity.
Capital preservation is now paramount, especially as crypto goes mainstream. This demand fuels innovation, leading to the emergence of complex financial instruments. On-chain structured products and complex derivatives will experience rapid growth in assets, marking a significant innovation in the current surge.
Lucas Kiely is Yield App's chief investment officer, leading the investment portfolio allocation and developing a diversified investment product range. He previously managed QIS and Structured Derivatives trading at Credit Suisse in Hong Kong and headed exotic derivatives at UBS in Australia.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph. The article is purposed for general information only and should not be considered as legal or investment advice.
Published At
12/22/2023 11:58:02 PM
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