Bitcoin’s Volatility May Be Reduced Due to the Derivatives Market for the Long-Term
It is important to look at the crypto-based derivatives market when we talk about Bitcoin (BTC). This year, several new companies such as the Intercontinental Exchange’s Bakkt have entered the game and started to plant the seeds for a future in which Bitcoin derivatives will be a major force in the market.
The volumes of derivatives markets are growing up recently. Looking at the perpetual swaps done on BitMEX, for instance, we can see that 2,363 perpetual swaps were done last year and that this year we have seen 2,681 of them, with around 40 days until the end of the year. This is a major growth.
This has led some experts to believe that the derivatives market will have a major impact on the industry, especially when it comes to reducing the volatility that plagues the Bitcoin industry.
Before the derivatives market got so important, most exchanges derived prices in spot trading from larger exchanges which had a higher volume. Even though they did this, not all markets were necessarily highly liquid. Now, however, the growth of derivatives markets, which are more liquid, is set to influence prices.
The more liquidity a market has, the less volatility it will have. Part of the reason why Bitcoin went up and down so quickly was that it is still a small market because it was not so popular yet. Now, the market is more diversified and sophisticated than ever and the volatility will probably be affected by these trends.