Butterfly spreads: the future of institutional and derivative crypto trading

Singapore, SINGAPORE – A butterfly spread is neutral and combines bull and beat spreads. It is often used in options trading when it is believed that the price of the underlying asset will not deviate much from what the price is now. And that’s possibly the cocoon phase of cryptocurrency trading that may require taking stock before the next stage of its life cycle. Our caterpillar seems to have stopped ingesting leaves and has spun itself into a pupa.

This is when metamorphosis is taking place. From the outside, it looks like nothing is going on. Or worse: the larva is dead.  But innately, rapid changes are taking place. There’s Coinbase launching its OTC trading for Coinbase Prime users as a compliment to its retail trading arm. Coinbase’s head of sales Christine Sandler says that “a lot of institutions were using OTC as an on-ramp for crypto trading”. Coinbase Prime institutional users can already trade easily with facilities including margin finance, OTC block trading and execution algorithms.  Given how lucrative it is, others such as Circle and Gemini have similar offerings. Poloniex which merged with Circle has also indicated that it is “focused on meeting the advanced trading needs of institutions”.

And then, there’s Nasdaq planning to launch and list their Bitcoin (BTC) futures early next year with the knowing approval of the Commodity Futures Trading Commission. Differentiation from BTC futures offered by competitors such as CME Group and Cboe Global Markets is also a concern. Not to mention that BAKKT’s Bitcoin daily futures by the Intercontinental Exchange (ICE) is also looking at the end of January to go live.

There’s no denying that futures contracts provide a useful trading tool provided there is liquidity of the underlying asset as it will lead to a wider dispersion of market participants. And in crypto, price volatility is a crucial ingredient in the success of a futures contract.

Closer to the region, Huobi is also kicking off their own Huobi Derivative Market (Huobi DM) in beta phase with the full gamut of hedging tools to complicate the process while also looking into their own stablecoin. The face value of these BTC contracts is US$100 with a minimum change in order book price at US$0.01. For now, it’s not available in the United States, Singapore, Malaysia, Iraq among others.

Down at the retail segment, robust daily trading volume across all actively-traded token pairs, a user-friendly interface and low trading fees are reasons why many surviving exchanges are in business even as there is an indication that prices are in a downward channel. Binance that looks like the monopolistic monolith just gave the second preview of its decentralised exchange. Of course, Binance Coin (BNB) briefly experienced a price surge.  That and plus a new study from MIT Technology Review that suggests US$7 million in monthly trading volume can be attributed to pump-and-dump schemes. And it’s still ongoing with the Official McAfee Pump Signals a headlining culprit. The real McAfee, on the other hand, is rumoured to prefer coprophilia and not devouring crap coins.

But it’s panic that’s the reason why irrational behaviour ensues triggering all stop-loss levels and parabolic movements that some say are the start of a new price cycle and jump in.  Or wait it out as this emerging asset fully rear its head.  Ignore the Bitcoin Cash Infinity War that has Roger Ver still bullish on the whole ecosystem. But there’s no denying that many are feeling the brunt.

It’s not full steam ahead as once promising Steemit cuts its staffing by 70% and Ethereum Classic development team such as ETCDEV shuts down. Miners chucking out their equipment is not the reason for raised blood pressures when traders can’t develop accurate volatility forecast in their pricing models.

Source: CoinMarketCap

Many are only concerned: Is the bottom here? BTC has fallen to US$3,734 and Ethereum (ETH) is now in double-digit doldrums. Small rallies forming on uptight shoulders does not have the fortitude to shoulders the burden and steep price reversals are often the result sprinkled with breakaway gaps. Tim Draper will tell you that any time is a good time to get in. But when is it a good time to get out? Or to at least swim over to a stablecoin that’s an appealing safety raft till we are extracted from our current predicament.

And while we may laugh at US President Donald Trump fumbling around the stage at the G-20 Summit and asking his handlers to “get me out of here”, the published declaration called “Building Consensus for Fair and Sustainable Development” stated the importance of crypto in the global economy albeit with money laundering and terrorist financing a legitimate concern. And remember, even as this adult butterfly emerges, blood needs to flow to the wings to get them flapping and ready for flight. And institutional blood will be there to provide the intravenous transfusion.