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Cryptocurrency Derivatives Are Here




Cryptocurrency adoption is currently outpacing regulation. First movers are already building financial products on top of the new asset class. Can we really understand the future of crypto through the historical lens of fiat?

Regardless of how you feel about cryptocurrency, its relatively humble origins aren’t stopping it from staking a claim as one of the predominant technologies that are defining a new era of global digitization. As “cryptos” become more ubiquitous, the advent of crypto-based financial products is poised to become part of the overall conversation of cryptocurrency becoming fully legitimatized.

Other technologies like autonomous vehicles, quantum computing, artificial intelligence, 3D printing, nanotechnology, and the internet of things will all surely play leading roles in shaping this new era as well. However, cryptocurrencies are what will push all the data through a global, decentralized, digital infrastructure. Cryptos won’t just simplify and facilitate transactions. They are creating new ways of capturing and exchanging value. By awakening previously dormant assets like human attention or latent computer memory, the potential for cryptocurrencies to profoundly change our mores and folkways is at the heart of this emerging technology. This is why cryptos aren’t just new, they are revolutionary.  

This potential has caught the world’s financial authorities and professionals largely off guard. Recently more and more major governmental regulators from different countries around the world have been commenting on the cryptocurrency token offering phenomenon. The deliberation by financial regulators of this new crowdfunding method has interwoven the debate over utility tokens versus security tokens. The combination of the two is stealing focus away from its usability as money. The next stage of cryptocurrency has quietly been gathering steam. Crypto-based financial products are ready to take things to a whole new level.     

Crypto-markets are currently extremely volatile. So far, there hasn’t been a deluge of regulation. Most of the laws that do affect cryptos are legacies from overlapping fiat laws, like those governing securities. Despite proof of concept having been established for cryptocurrency exchanges, token protocols, consensus algorithms, and, most importantly, the blockchain tech underpinning it all, crypto-market fundamentals do not directly translate to established economic principles. Moreover, until regulators emboss cryptocurrencies with the stamp of governmental approval, everything done under the umbrella of cryptocurrencies, no matter how theoretically plausible or financially incentivizing, must be understood as high risk. In finance, with high risk comes high reward. Financial products were created to produce both risk and reward, and these products are being applied, sometimes very successfully, to cryptos today.

Crypto-based derivatives, like their fiat counterparts, are designed to reduce an investor’s risk. However, like in fiat, derivatives can also be used solely as a mechanism for profit. Derivatives are essentially contracts between two or more parties. Derivatives are based on the underlying value of an asset, index, or other entity. Derivatives are a natural fit for cryptocurrencies for three main reasons.

First, we’ve digitized our money. This doesn’t necessarily mean cryptocurrency. In general, from direct deposit to quantitative easing, today’s primary means to engage in financial transaction is electronically. Second, the stipulations of packaged derivatives (the contracts that define the rules) are themselves now available in a digitized version called an EDCC (Executable Distributed Code Contracts). Third, cryptocurrencies are a perfect use case for derivatives because cryptocurrency transactions can be electronically broken down into micropayments and arranged into a myriad of solutions to create derivatives that minimize risk and maximize profit.

Recently, the US Commodity Futures Trading Commission (CFTC) awarded the first derivatives clearing organization (DCO) rights to a blockchain company. The CFTC’s decision to allow derivatives trading in cryptocurrencies opens up new possibilities for investors as well as signaling to the world that the United States will continue to lead financially. Alongside the rise of other financial technologies like machine learning and artificial intelligence, which will take data analytics to new levels of extrapolation, derivatives in crypto may be the key to opening up the true potential of market profitability for cryptocurrencies.  

Jordan Daniell

Jordan Daniell has a passion for techno-social developments and cultural evolution. In his spare time, he enjoys astronomy, playing the bagpipes, and exploring southern California on foot. Jordan holds value in Ether.

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