Analysis: Why Crypto Derivatives Are Considered Dangerous

Analysis: Why Crypto Derivatives Are Considered Dangerous


There is a new generation of cryptocurrency-based derivatives being launched in 2019 which could significantly increase overall trading flow and attract a new breed of investors. Derivatives are not without their controversies however. Over the years, they have acquired a negative reputation in some quarters, exacerbated by movies such as “The Big Short.”

Also read: Market Slump Puts Crypto Derivatives in the Spotlight

Understanding the Danger of Derivatives

Analysis: Why Crypto Derivatives Are Considered Dangerous
The Big Short, 2015.

Derivatives are financial securities that are based or tied in some way to another asset. The majority of derivatives are sold over-the-counter (OTC) and the primary danger associated with trading these is counterparty and liquidity risks. The movie “The Big Short,” released in 2015, is useful in understanding the hazards of derivatives. But in that particular case, the mechanism under scrutiny was credit default swaps (CDS), a type of derivative which helped upset the global economy in 2007-2008. Due to the opaque nature of derivatives, as well as other inherent risks, world leaders have been taking increased interest in the products. 

Currently there are a number of major players in finance offering crypto derivatives. These include NASDAQ, Cboe Global Markets, and Goldman Sachs. Lars Seier Christensen, chairman of Concordium and founder of Saxo Bank, has said that the introduction of new cryptocurrency-based derivatives in 2019 will hinge on the overall trading flow.

Christensen said: “If the primary cryptocurrency exchange market continues to be in trouble there will be little appetite for launching new trading vehicles. On the other hand, if trading picks back up, it is quite likely that we will see a slew of new initiatives being launched — perhaps even some that have already been planned and gone through due diligence but where the offering party have been waiting for a better time to launch.” 

UK’s FCA Is Considering Banning Crypto-Based Derivatives

Analysis: Why Crypto Derivatives Are Considered DangerousBefore the crypto market gets ahead of itself with further launches of complex products, financiers should note that regulators are cracking down in some quarters. The U.K.’s Financial Conduct Authority has expressed concern and is considering banning some cryptocurrency-based derivatives. This move by the U.K. regulator has been noted as the first major intervention in the cryptocurrency market.  

Christopher Woolard, executive director of strategy and competition at the FCA, delivered a speech at the Regulation of Cryptocurrencies event in London, in which he said: 

“We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens with underlying market integrity issues. Given this, the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets, for example, exchange tokens, including contracts-for-difference, options, futures and transferable securities.”

Frank Wagner, CEO of INVAO, a blockchain asset pool leveraging automated trading for active portfolio management, explained the concern with cryptocurrency based derivatives is that retail investors may be sold unreliable derivatives products, such as contracts for difference, options and futures.

Derivatives Have a Poor Reputation

Analysis: Why Crypto Derivatives Are Considered DangerousWagner said: “The nature of the crypto market being fast-moving and volatile in comparison to the traditional market has led to it attracting a measure of concern. Making accurate predictions on prices in the cryptocurrency market is difficult. This is combined with the fact that derivatives themselves have a poor reputation.” 

On the plus side, Wagner explained, derivatives can offer some insulation from market uncertainty and therefore an opportunity for new investors to get involved.

“There’s a lot of anticipation that crypto derivatives will actually make the market more reliable and legitimate by boosting investor activity, mainstream attention, and thus liquidity and trading volumes,” said Wagner.

Further Regulation Will Give Investors Security

According to Wagner, the concern that crypto derivatives are unregulated, and therefore unstable, can be solved through welcome government regulation of digital assets.

“If an exchange is to offer crypto derivatives, it must be regulated, legitimate and secure for investors, which is one of the many reasons why regulation is needed. Crypto derivatives will help to mature and stabilise the industry,” he added. 

The most eagerly anticipated crypto derivative in 2019 is Bakkt’s physical bitcoin futures. The success of this product, particularly in terms of investor uptake, will help to determine the rate at which subsequent derivatives are launched. Unlike in “The Big Short,” crypto derivatives do not threaten the global economy. Nevertheless, they remain a controversial financial product whose effects upon the cryptocurrency market have yet to be fully assessed.

What are your thoughts on cryptocurrency derivatives? Let us know in the comments section below.

Images courtesy of Shutterstock and Paramount.

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The Daily: Electrum Users Targeted by Hackers, Huobi DM’sDaily Volume Exceeds $1B

The Daily: Electrum Users Targeted by Hackers, Huobi DM’s Daily Volume Exceeds $1B

The Daily

Electrum developers have confirmed reports of an attack against the popular cryptocurrency wallet. Also covered in The Daily, Huobi Derivative Market’s daily trading volume has reached $1 billion, and one of the founders of Brazil’s leading crypto exchange Foxbit has died in a car crash.

Also read: UFC 232 to Have Official Crypto Partner, 5% of Israelis Use Bitcoin

Electrum Developers Scramble to Stop Phishing Attack

The Daily: Electrum Users Targeted by Hackers, Huobi DM's Daily Volume Exceeds $1BUsers of the Electrum bitcoin wallet have been targeted in a new phishing attack, the project’s developers confirmed on Twitter. The team notes that the wallet’s official website is and warns against downloading the software from any other source.

The attack, which began about a week ago, has been conducted through malicious servers. When asked to broadcast a transaction through a legitimate Electrum wallet, these servers reply with an error message, directing users to download a fake ‘security update’ from an unauthorized Github repository.

At startup, the malicious software asks users for a two-factor authentication code, an unusual request as the 2FA codes are needed only when sending funds. The app then uses the code to transfer the stolen digital cash to addresses controlled by the attacker.

Electrum is one of the most popular cryptocurrency wallets with support for major coins such as bitcoin core, bitcoin cash, litecoin, and others. According to a report by Zdnet, the unknown hacker or hackers have so far managed to misappropriate over 200 BTC.

The Daily: Electrum Users Targeted by Hackers, Huobi DM's Daily Volume Exceeds $1B

Electrum developers released an update, version 3.3.2, after they were notified of the attack. However, they admitted in a blog post that “This is not a true fix, but the more proper fix of using error codes would entail upgrading the whole federated server ecosystem.” Gitub admins have also taken down the attackers’ repository.

In January of this year, Electrum issued an emergency patch for another bug. The vulnerability exposed passwords allowing websites hosting the wallets to potentially steal cryptocurrency belonging to their users.

Huobi DM’s Daily Trading Volume Surpasses $1 Billion

The Daily: Electrum Users Targeted by Hackers, Huobi DM's Daily Volume Exceeds $1BHuobi Derivative Market’s daily volume has exceeded $1 billion within a month after the launch of the trading service, the Singapore-based cryptocurrency exchange announced. The threshold was reached on Dec. 25, which was also a strong day for the company’s main trading platform, Huobi Global, with the combined trading volume of both Huboi’s platforms amounting to $2 billion on Christmas day. Huobi Global CEO Livio Weng commented:

This just goes to show the market demand for more sophisticated crypto trading tools, particularly those that allow traders to control risks in volatile markets. Huobi DM is a priority for us and we will continue to enhance it over the coming months.

The cryptocurrency contract trading feature offered by Huobi Derivative Market allows users to buy or sell bitcoin core (BTC) and ethereum (ETH) at predetermined prices and specified times in the future. That provides traders with a number of options such as arbitrage, speculation, and hedging. Huobi also plans to offer support for more cryptocurrencies, with EOS contracts already scheduled to go live on Friday.

Foxbit Co-Founder Gustavo Schiavon Dies in a Car Crash

The Daily: Electrum Users Targeted by Hackers, Huobi DM's Daily Volume Exceeds $1BGustavo Schiavon, one of the founders of the leading Brazilian cryptocurrency exchange Foxbit, has died in a road accident. While driving between Marília and São Paulo, the young entrepreneur reportedly lost control over his car and ran into a cargo truck. Gustavo’s girlfriend, Ariadny Rinolfi, has survived but has been hospitalized in serious condition. Another victim died in the crash that involved a total of two passenger cars and two large trucks.

Schiavon established Foxbit in 2014 with three other partners – João Canhada, Marcos Henrique and Felipe Trovão. In the following years, it became Brazil’s largest digital asset trading platform. This past March, the exchange lost to hackers 1 million Brazilian real (approximately $260,000), however, restored customers’ balances with the company’s own reserves.

This year Foxbit was also involved in a lawsuit against a commercial bank that closed its account citing concerns over money laundering. Without presenting evidence in court, the bank claimed it had the right to shut down accounts which it determined to be risky, which was later confirmed by Brazil’s judiciary.

What are your thoughts on today’s news tidbits? Tell us in the comments section.

Images courtesy of Shutterstock, Electrum, Foxbit.

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