3 Insights on Crypto Derivatives and Risk from Veteran OTC Traders

To get a look inside this business, CoinDesk Research talked to two veteran OTC traders in a live webinar on Oct. 28.

Traders like Martin and Yin are tasked with managing that risk by moving large amounts quickly and offsetting it on derivatives markets, including BitMEX, Huobi, OKEx, CME Bitcoin Futures and Bakkt.

As a result, they are among the most sophisticated traders on crypto derivatives exchanges.

First of all, market moves get started on derivatives exchanges more often than on spot exchanges.

In isolated examples, like the May 17 flash crash, a small amount on spot markets can cause a large move on the offshore derivatives markets, specifically BitMEX, allowing traders to manipulate the spot price in favor of their derivatives markets position.

Theoretically, that's possible on regulated crypto derivatives markets like CME's, but it's more expensive and difficult because the leverage is not as high.

"Where things tend to break down a bit and you get a lot more slippage is when you've simply exhausted everybody's ability to really use the derivatives instruments to hedge, so whether that's the amount of collateral that everyone's posted is insufficient, or the market conditions are such that you really can't get access to some of these platforms," Yin said.

A handful of OTC desks can provide swaps and custom derivative products, including contracts for difference, but those two products have dominated market volume so far.

"These markets move really quickly and a lot of the bigger places that want to start trading, there's a significant amount of headline risk attached to this. How do they protect against the crazy downside move? Options may very well help eliminate some of those risks for them."

Listen to the full webinar for Yinfeng and Martin's unfiltered opinions on risk, liquidity and derivatives in crypto markets.