Crypto derivatives are financial products that enable traders to create leveraged long or short exposure to cryptocurrencies. Derivatives can be used for both speculative and hedging activities. However, as things stand today, crypto derivatives are mostly viewed as high risk – high returns trading instruments and are immensely popular among experienced traders. These advanced traders also tend to drive significant trading volumes. Seeing the success of derivatives-only exchanges like BitMex, spot exchanges too have started offering crypto derivatives trading. The most notable among these is Binance which recently launched bitcoin futures.
Currently, both the incumbents and the new entrants in crypto derivatives trading are focused only on Bitcoin and a handful of other top 10 market cap coins. This behaviour is the result of two factors: (a) The top 10 crypto assets account for lion’s share of crypto trading volume and (b) creating well-functioning and liquid altcoin derivatives markets is extremely challenging. The mix of high volatility, limited spot liquidity in spot and leverage means that altcoin derivatives necessitate a blazing-fast matching engine and robust risk management systems. Given these, most exchanges view altcoin derivatives as a niche that’s hard to conquer. Delta Exchange however is seeing an opportunity where others are seeing difficulties.
As crypto trading matured, trading activity expanded beyond Bitcoin to altcoins. It was this secular trend that helped Binance win spot crypto trading despite being a late entrant. A similar story is likely to play out in crypto derivatives. As crypto derivatives trading matures, it will expand to altcoins. Signs of this phenomenon are already visible in the strong demand for futures on buzzy altcoins like Link, Tezos and Basic Attention Token. Delta Exchange is positioning itself to capture this demand and grow with it. Let us look at the factors that can position Delta to be a strong player in the niche of altcoin derivatives.
Focus on altcoins
Delta Exchange is one of the first derivatives exchanges to focus on altcoins. The exchange currently offers futures and perpetual contracts on 13 leading altcoins and Bitcoin. The altcoin contracts that can be traded on Delta include large cap alts like XRP, ETH and LTC as well as mid cap coins like LEO, XMR and XLM.
Exclusive access to altcoins
Binance was a late entrant to spot cryptocurrency trading segment. When it launched in mid 2017, players like Kraken, Bittrex and Poloniex were already well established. Binance was able to best competition by providing comprehensive and, in many cases, exclusive access to altcoins. Competition couldn’t list altcoins fast enough, making Binance the destination of choice for traders.
Delta Exchange is poised to do the same in the altcoin derivatives market. Perpetual contracts for coins like ATOM, Tezos, RVN, and BAT are only available on Delta Exchange. Traders looking to long or short these altcoins have only one option available to them – start trading on Delta. Exclusive access fuelled Binance’s growth and could do the same for Delta Exchange.
Trade in altcoins without owning them
All contracts on Delta Exchange are margined and settled in Bitcoin or USDC. This means traders do not have to buy or hold altcoins to be able to trade in their derivatives. This reduces their risk of holding sometimes illiquid altcoins.
The option of settlement in a stablecoin like USDC provides another tool for traders to manage risk. A trader can protect her balance from market volatility by choosing to maintain balances in stablecoin.
The right team & product
Success of any project, in large measure, depends on the team. The founding team of Delta Exchange seems to have the right skills and experience for building and running a crypto derivatives exchange. Two the cofounders have worked with top Wall Street firms viz. Citigroup and UBS and have deep understanding of derivatives trading. The technical cofounder has built and sold companies that scaled to millions of users.
The Delta team has been able to leverage these past experiences and build a product that is capable of handling the combination volatile markets and high leverage. The exchange has also focussed heavily on risk management. This is evident at multiple points in a trade’s life cycle: margin requirement increases with trade size, a trade can happen only within an allowed band and positions are liquidated using an intelligent algorithm that seeks to minimise market impact of liquidations.
Such risk management practices are part and parcel of traditional exchanges. However, risk control has not been the strong suite of crypto exchanges. This in the past has exposed exchanges to the risk of market manipulation and their clients to the risk of huge losses. Delta Exchange has taken the right call to focus on building strong trading and risk management systems, especially given their focus on altcoin derivatives.
Loyalty rewards: trade more & pay less
Delta Exchange offers a 50% payback on the trading fees. These fee credits can be used to pay the fees for future trades. This offer rewards loyal traders and provides consistent 50% discount in trading fees to those traders that trade on Delta Exchange regularly.
Altcoins trading has been an interesting area as far as cryptocurrency exchanges are concerned. In 2017, incumbent exchanges were not prepared for the explosive growth in altcoins trading. This gave Binance the opportunity to ride the altcoin wave to the top. Now, history seems set to repeat itself in altcoins derivatives market. Almost all prominent derivatives exchanges are focused on bitcoin futures. Delta Exchange however is thinking differently and is betting big on altcoin derivatives. It remains to be seen if Delta Exchange can pull off in crypto derivatives trading what Binance did for crypto spot trading.
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