Derivatives Exchanges Look to Add Liquidity to the Bitcoin Market

Bitcoin’s immaturity relative to conventional financial markets may hinder the uptake of dedicated derivatives-trading platforms.

Institutional Investor

February 4, 2015

By Robert Stowe England


Say what you will about Bitcoin’s ebbs and flows, the cryptocurrency’s profile just keeps rising. As it has been in the past with Bitcoin, each new player seems to increase the odds that more will join the wave.


Yet so far, Bitcoin trading volumes in U.S. dollars —  done mostly on overseas exchanges in places like Slovenia and Hong Kong —  have been low. Bitcoin trading hit a seven-day average of $39.5 million in December 2013. A year later, the seven-day average was about $2.6 million. A handful of U.S.-based Bitcoin-derivatives-trading companies launched during the past two years is on a mission to pour some liquidity into the Bitcoin economy. Some of these platforms are not yet in full operation, whereas others already offer traders a variety of derivative instruments, including forwards to total return swaps. But whatever the timeline for rollout, the need is there.


“The underlying commercial story line needs institutional capital markets for it to really thrive,” says Christian Martin, co-founder and CEO of TeraExchange, a derivatives exchange based in Summit, New Jersey.


The derivatives exchanges may face a bumpy road on the way to assuming the major role they expect to play, however. For one thing, bringing together the disparate world of regulated financial markets with the Bitcoin and blockchain-related businesses is fundamentally challenging because they represent two incompatible systems, according to Daniel Gallancy, co-founder and CEO of SolidX Partners, a New York–based firm that offers institutional investors total return swaps on Bitcoin. Both markets are functional markets, although the Bitcoin market is comparatively immature, he claims. “Market A doesn’t really connect to Market B, both related to logistics and information,” he explains. “We need to fix that.” One way to create those interconnections, Gallancy adds, is through derivatives that bring the liquidity of regulated financial markets to Bitcoin and “help mature the Bitcoin market” in the process.


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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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