In 2018 the cryptocurrency space has been experiencing a serious influx of institutional investors, which can be attributed to several key factors. Of course, Bitcoin reaching its all-time high of nearly $20,000 at the end of December 2017 played a massive role, but its relative stability over the last 6 months was arguably an even bigger factor. Right now, Bitcoin’s price is actually more stable than Netflix, Facebook or Amazon.

Nevertheless, cryptocurrency investments are still rightfully considered to be an extremely high-risk business venture. One way of hedging potential risks that’s been gathering momentum lately is the cryptocurrency derivatives. Essentially, derivatives are contracts that derive their payout from an underlying asset. These contracts can come in many different forms, such as futures, options, swaps, contracts for differences (CFDs) and so on.

Crypto futures — derivative contracts in which each party agrees to exchange cryptocurrency at a set future date and a price agreed by all parties — have actually been around for quite a while. BitMEX, one of the most popular cryptocurrency trading platforms, is actually a derivatives exchange. On BitMEX, you aren’t actually trading BTC, but rather making bets on its future price, denominated in US dollars. There are several other exchanges that offer cryptocurrency futures, such as Deribit, BitBay, and Okex.

However, it should be noted that all of the exchanges mentioned above are private and unregulated exchanges, where futures are mostly used for speculation, which is by no means ideal for serious institutional investors. Still, the interest is definitely there, as was proven by LedgerX, a clearinghouse specializing in crypto derivatives. Back in July 2017, they were granted a Derivatives Clearing Organisation (DCO) by the Commodity Futures Trading Commission (CFTC). Essentially, they became the first ever federally regulated exchange to list and clear fully-collateralized and physically-settled Bitcoin swaps and options for institutional investors. In just six months following their launch of cryptocurrency derivatives, LedgerX reported a sevenfold increase in trading volume.

Several months later, the Chicago Mercantile Exchange (CME) became the first traditional exchange to offer to offer Bitcoin futures. CME is one of the world’s leading derivatives and futures marketplaces, so once they introduced Bitcoin futures, the domino effect ensued. The Chicago Board Options Exchange (CBOE) was the second traditional marketplace to offer Bitcoin futures, relying on the Winklevoss twin’s Gemini exchange for their price references. The CBOE president Chris Concannon also revealed that the exchange has plans to build an entire ‘crypto-complex’, which will include other coins beside Bitcoin, such as Ethereum and Litecoin.

This is where the biggest players on the market started showing significant interest in crypto derivatives. In light of that news and announcements, Goldman Sachs hired a cryptocurrency trader to explore ‘how to best serve’ their clients.

So, the gears are in motion. Evidently, there are a lot more institutional investors entering the market, which is undoubtedly beneficial to them — they have a new asset to make money off. But how the wide adoption of cryptocurrency derivatives will affect the crypto market itself? First of all, the attention towards cryptocurrencies from institutional investors might pressure the regulators to re-evaluate their concerns about cryptocurrencies. Derivatives regulated by government agencies is probably not a very bad idea and it could decrease the assets’ volatility.

On the other hand, there’s always a chance of regulators taking a completely different approach. Just last week the U.K.’s Financial Conduct Authority (FCA) has stated that it will consider the outright ban of all crypto derivatives. The agency emphasized that leveraged crypto-based derivatives are even riskier that spot market trading and could potentially cause losses that go far beyond the initial investment and impose additional fees on top of that.

Still, the vast majority of the crypto derivatives available right now are simply Bitcoin futures. Considering that Bitcoin is routinely having 3–4 times more daily volume than it’s closest competitor Ethereum, the introduction of altcoin derivatives could give a major boost to their liquidity and trading volumes. This would be a welcome change, as the more awareness of broader cryptocurrency market, there is, the more money will be infused into it, which could result in a lot less volatility of altcoins’ prices.

Finally, albeit not being a derivative, cryptocurrency ETFs have been the theme of this year within the crypto community. It seems that everyone wants a Bitcoin ETF, but the U.S. Securities and Exchange Commission (SEC) has rejected over a dozen ETF applications this year, submitted by the Winklevoss twins, ProShares, Direction and GraniteShares. SEC is currently reviewing several other applications, with the join attempt by SolidX and VanEck seen as the clear favorite. It’s hard to predict when the decision will be made, as SEC has already pushed the deadline several times.