Dutch-based cryptocurrency derivatives exchange Deribit has announced it is starting up a weekly publication covering in-depth research on the digital asset markets. The publication will be called “Insights” and will provide analysis of events and developments past, present, and future, free to read for everyone.
The first report is already out, focusing on the liquidation mechanisms used by the different cryptocurrency derivatives platforms. Derivatives brokers in the traditional financial markets have the protection of regulation in case a trader doesn’t respond to a margin call. In the cryptocurrency markets, trading isn’t regulated, so exchanges need a way to offset their loss risk.
An Unprecedented Problem
Different exchanges take different approaches to this challenge. For example, Deribit and OKEx adopt a policy of partial liquidation, whereas BitMEX and Huobi will go for a full liquidation. Like most aspects of the crypto markets, these liquidation mechanisms have evolved over time and in response to specific events.
The Deribit report draws on a significant event that happened in May of this year, when a $30m selloff at Bitstamp resulted in the liquidation of $250m of long positions on BitMEX, forcing the price of Bitcoin down on other exchanges. The link here is that, at the time, Bitstamp was one of two exchanges BitMEX used to generate its Bitcoin price index. It has since added a third. However, this case illustrates the vulnerability of the cryptocurrency markets to sophisticated trading tactics that can manipulate prices.
The report concludes with some recommendations regarding how cryptocurrency trading platforms can better protect against events like the May selloff. These include a more robust price indexing methodology, adopting a policy of partial liquidation over full liquidation, and operating user-owned insurance funds.
It’s an intriguing read, providing food for thought about the challenges faced by crypto-derivatives exchanges operating in an unregulated market. These challenges are unprecedented in the traditional financial markets due to the regulated status. Therefore, it’s fascinating to consider in-depth how the crypto markets are taking steps to respond to defend against the liquidation risk, without the safety net of regulation surrounding them.
To produce the Insights research, Deribit has teamed up with Su Zhu and Hasu, expert analysts who have a form in this area. Su Zhu is the CEO of Three Arrows Capital, an FX Hedge Fund, and Co-Founder of Sensus Markets, a Digital Asset Principal Trading Firm. Hasu is an independent researcher who’s been publishing articles since 2018, most recently on uncommoncore.co. He’s also an investor and has a background in game theory.
Deribit is no doubt hoping that Insights will become a rival to BitMEX’s counterpart offering, called BitMEX Research. Although BitMEX still dominates crypto futures trading, Deribit appears to be positioning itself as a firm contender in the overall crypto derivatives space.
The Dutch exchange is the first to market with European-style options, which have been gaining traction over recent months.
With Bakkt, Coinflex, LedgerX, and others in the market, it appears that the competition for crypto-derivatives is heating up fast.