Cryptocurrency derivatives

Could we See Cryptocurrency derivatives?

We already have well established cryptocurrency exchanges. These are essentially places like Coinbase and Bitstamp where people can go and exchange their Fiat money for cryptocurrencies. It works much like a traditional Fiat currency exchange but has no connection.

It is agreed that one of the major steps that can be implemented to drive cryptocurrencies towards mass adoption is to eliminate a lot of the friction that people will encounter when they attempt to enter the crypto markets. There is no simple exchange where they can enter coin positions on the traditional markets.

Enter Crypto Derivatives

This could eventually change thanks to an initiative by Nasdaq. Nasdaq is an exchange operator that has several of exchanges over the world for fiat money to buy assets. For example, they oversee the Copenhagen Stock exchange, the Helsinki stock exchange, the Stockholm stock exchange and the Nasdaq Vilnius OMX exchange.

Nasdaq Cryptocurrency Derivatives

Nasdaq is also particularly powerful in the Nordic countries where they list hundreds of companies on the Stockholm exchange. It is at this location that the company is trying to launch cryptocurrency linked derivatives.

Other Exchanges

On the Nasdaq Stockholm exchange, you have Bitcoin linked exchange traded notes (ETNs). These are issued by XBT Provider which is owned by Coinshares. These have been able to track the price of Bitcoin over the past two years quite effectively.

Prior to the purchase of XBT provider by coinshares, they offered a range of Euro linked cryptocurrency ETNs called Bitcoin Tracker One and Bitcoin Tracker Euro. They are derivatives which means that they derive their value from the price of the underlying assets. As the price of Bitcoin moves so should the value of these ETNs.

Bitcoin Exchange Traded Notes

This is about to change as CoinShares is about to use their expertise to launch an Ethereum linked ETN. This will also be on the Nasdaq Stockholm and will go by the name Ether Tracker one and Ether Tracker Euro.

Why The Long Wait

Many people are interested in hearing why it took over 2 years for CoinShares to take the step from a Bitcion ETN to that of an Ethereum based one. According to the co-founder of CoinShares, Ryan Radloff, this was because there had not been enough of the Ethereum core team going out and making the case to the traditional players in finance.

He did acknowledge the Ethereum developers and the Ethereum blockchain is one of the most sophisticated and strongest cryptocurrency initiative. However, there had not being enough of these smart people going out and making the case for Ethereum being listed on an exchange.

Hence, CoinShares decided that they wanted to pick up this task and make the Ethereum investment case. Obviously, listing the ETNs on the Nasdaq Stockholm will be a major game changer. It will allow investors who have exposure to Nasdaq to add Etheruem to that exposure.

Although the company does not solicit clients directly from the US, there are a number of businesses in the US, there are a number of Investment providers in the US who can use particular platforms in order to buy the ETNs.

Radloff also claimed that although he was long term bullish on adoption of Ethereum based investment instruments, he acknowledged the great deal of steps still to be taken before any sort of mass adoption can occur. He claimed that there had to be a great deal of work that was done with the clearing authorities and exchanges.

Ethereum Volatility

He also took the long term view that the Ethereum protocol itself may threaten the established exchanges. Smart contracts and decentralised applications are what could eventually be used with online share trading and other blockchain based exchanges.

There is also general concerns about how an exchange traded note can handle something that is generally outside of traditional finance. That is the hardforks or splits in the chains. There is currently an Ethereum hardfork that is taking place although many people think that it will be uneventful.

A New Asset Class

There is also great optimism in what a established crytpocurrency derivative market can do for the physical trade of these coins. They will be able to enhance liquidity, hedging options and allow for more diverse risk management strategies. This is something that many large institutions and investment houses will no doubt look favourably upon.

One of the major requirements in order for these derivatives to proliferate is how widely used cryptocurrencies are and whether they are able to maintain value throughout various market reactions.