We've all heard stories of billion-dollar future contracts liquidations beingness the cause of 25% intraday toll crashes in Bitcoin (BTC) and Ether (ETH) just the truth is, the industry has been plagued by 100x leverage instruments since BitMEX launched its perpetual futures contract in May 2022.

The derivatives manufacture goes far beyond these retail-driven instruments, as institutional clients, mutual funds, market makers and professional traders can benefit from using the instrument's hedging capabilities.

In Apr 2022, Renaissance Technologies, a $130 billion hedge fund, received the green calorie-free to invest in Bitcoin futures markets using instruments listed at the CME. These trading mammoths are null similar retail crypto traders, instead they focus on arbitrage and non-directional risk exposure.

The brusque-term correlation to traditional markets could rise

As an asset class, cryptocurrencies are becoming a proxy for global macroeconomic risks, regardless of whether crypto investors similar it or not. That is not sectional to Bitcoin because almost commodities instruments suffered from this correlation in 2022. Even if Bitcoin toll decouples on a monthly footing, this brusk-term gamble-on and risk-off strategy heavily impacts Bitcoin's price.

Bitcoin/USD on FTX (blue, correct) vs. U.S. 10-year yield (orange, left). Source: TradingView

Notice how Bitcoin'south price has been steadily correlated with the United States 10 twelvemonth Treasury Neb. Whenever investors are demanding higher returns to hold these fixed income instruments, at that place are additional demands for crypto exposure.

Derivatives are essential in this instance considering almost common funds cannot invest straight in cryptocurrencies, so using a regulated futures contract, such equally the CME Bitcoin futures, provides them with access to the marketplace.

Miners will apply longer-term contracts equally a hedge

Cryptocurrency traders neglect to realize that a short-term cost fluctuation is not meaningful to their investment, from a miners' perspective. As miners become more professional person, their need to constantly sell those coins is significantly reduced. This is precisely why derivatives instruments were created in the beginning place.

For instance, a miner could sell a quarterly futures contract expiring in iii months, effectively locking in the price for the period. Then, regardless of the price movements, the miner knows their returns beforehand from this moment on.

A similar effect can be achieved past trading Bitcoin options contracts. For example, a miner can sell a $twoscore,000 March 2022 phone call selection, which will be enough to compensate if the BTC price drops to $43,000, or xvi% below the electric current $51,100. In substitution, the miner's profits to a higher place the $43,000 threshold are cut by 42%, then the options instrument acts as insurance.

Bitcoin'south use as collateral for traditional finance will expand

Allegiance Digital Assets and crypto borrowing and substitution platform Nexo recently appear a partnership that offers crypto lending services for institutional investors. The joint venture will allow Bitcoin-backed cash loans that can t be used in traditional finance markets.

That move volition likely ease the pressure of companies like Tesla and Block (previously Square) to go on adding Bitcoin to their remainder sheets. Using it as collateral for their 24-hour interval-to-twenty-four hours operations vastly increases their exposure limits for this asset class.

At the same time, even companies that are not seeking directional exposure to Bitcoin and other cryptocurrencies might do good from the manufacture's higher yields when compared to the traditional fixed income. Borrowing and lending are perfect employ cases for institutional clients unwilling to have direct exposure to Bitcoin'south volatility just, at the same fourth dimension, seek higher returns on their avails.

Investors will use options markets to produce "fixed income"

Deribit derivatives exchange currently holds an lxxx% market share of the Bitcoin and Ether options markets. Still, U.S. regulated options markets like the CME and FTX Us Derivatives (previously LedgerX) will eventually gain traction.

Institutional traders dig these instruments considering they offering the possibility to create semi "fixed income" strategies like covered calls, atomic number 26 condors, bull phone call spread and others. In addition, by combining call (buy) and put (sell) options, traders tin gear up an options trade with predefined max losses without the risk of being liquidated.

It'southward likely that fundamental banks across the globe will worldwide keep involvement rates near zero and below inflation levels. This means investors are forced to seek markets that offer higher returns, fifty-fifty if that means carrying some take chances.

This is precisely why institutional investors volition exist entering crypto derivatives markets in 2022 and changing the industry every bit we currently know.

Reduced volatility is coming

As previously discussed, crypto derivatives are before long known for calculation volatility whenever unexpected toll swings happen. These forced liquidation orders reflect the futures instruments used for accessing excessive leverage, a state of affairs typically acquired by retail investors.

However, institutional investors will proceeds a broader representation in Bitcoin and Ether derivatives markets and, therefore, increase the bid and ask size for these instruments. Consequently, retail traders' $1 billion liquidations volition take a smaller impact on the price.

In brusque, a growing number of professional players taking part in crypto derivatives will reduce the touch on of extreme price fluctuations past arresting that lodge menstruum. In fourth dimension, this effect will be reflected in reduced volatility or, at least, avoid problems such equally the March 2022 crash when BitMEX servers "went down" for 15 minutes.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should comport your own research when making a conclusion.