Matrixport Market Research Report 3rd Edition, 19th August 2020

Matrixport Research

Summary

The cryptocurrency (crypto) derivatives market remains untapped and has great potential for future development. In particular, the options market has huge room for growth, with an estimated 50-100x increase potential. The two key reasons are as follow:

Within the Forex market, the options market is estimated to be around 15% of the size of the spot market, while this ratio is only 0.76% within the crypto market. By using this proxy, we predict that in the future, BTC options market will grow by 20-25x. In addition, we believe that there will be new options products for other crypto (other than BTC and ETH), resulting in an expansion in the overall crypto options market;
Across time, the overall public has continuously increased their attention and acceptance of crypto. This is likely to lead to more retail investors entering the market, boosting the overall crypto industry. Based on conservative estimates, the crypto spot market will grow by 20-30% annually for the next few years, doubling its size within the next 3 years.

In addition, there is an increasing number of institutional investors entering the crypto market, resulting in an increase in capital flow. In our opinion, the institutionalization of the overall market will continue.

10 years have passed in the crypto industry since the genesis block of Bitcoin was mined. During this period of time, BTC has been categorized as a “currency” by the US Federal Reserve, and the value of BTC has increased by a few millions times, reaching a market capitalization of US$200b, a value that is far above many countries’ native currency. The rapid raise of BTC has brought about the swift development in the entire crypto industry, driving the demand for investment and hedging opportunities within the space. Along with this development, the crypto derivatives market has grown to become an important element within the industry. Based on our observation, the crypto derivatives market remains untapped and possesses immense growth potential for the future.

1) Compared to the market structure of the traditional Forex market, the demand for derivatives products in the crypto market remains untapped

In the recent year, the spot market daily trading volumes for BTC and ETH have been US$11.4b and US$4.5b respectively. While the futures market daily trading volumes for BTC and ETH have been US$11.2b and US$1.9b respectively. Comparatively, the options market is much smaller, with BTC and ETH average daily trading volume at US$61m and US$4m. Despite the recent increase in volatility, the BTC and ETH options trading volumes have only hit $100m and $40m, less than 1% of trading volume in the spot market.

Despite the smaller size, the derivatives trading volumes of BTC and ETH have been on the rise in the recent year, with the ratio of futures/spot and options/spot markets gradually growing.

Within the Forex market, the size of the spot market is 30.13%, futures market (including forwards and swaps) is 65.36%, while options market accounts for the remaining 4.51%. The market size of the various futures-related products is 2.17x larger than the spot market, while the options market is 15% of size of the spot market. From January to July 2020, BTC and ETH average transaction volume for options is 0.76% and 0.15% compared to the respective spot market. Therefore, we can assume that the BTC options market has a potential to increase by 20x.

Furthermore, based on the market structure of crypto options, BTC accounted for majority of the volume at 90% while ETH had 10%. However, as seen from diagram 5, ETH options volume has been increasing recently and has accounted for a larger slice of the market share. As the options market continues to mature, we believe that the crypto options market will resemble the futures market, with a number of new options products based on other crypto appearing in the market, and bring about growth in the overall options market.

2) The overall crypto market is expected to continue expanding with growing acceptance amongst public

In the recent years, the public’s level of acceptance for crypto has been continuously improving. In December 2018, the Bank of England launched a survey “If you receive money as a gift at Christmas, what’s your favorite way to get it?”. Based on the response, 75% of the respondents chose crypto, 18% chose cash, 5% chose bank transfer, and the remaining 2% chose gift vouchers.

In 2019, Blockchain Capital did a survey which showed that percentage of people that have heard of Bitcoin rose from 77% in 3Q2017 to 89% in 1Q2019. Of which, the percentage of people that are ‘at least somewhat familiar’ with Bitcoin increased from 30% in 1Q2017 to 43% in 1Q2019, with younger demographic being the most aware.

The public perception and acceptance of BTC has been on the rise. In 3Q2017, only 30% of the respondent viewed BTC as a positive innovation in fintech while 43% responded postively in 1Q2019.

Based on the results, as of 1Q2019, there are approximately 27m crypto holders in the US, accounting for 9% of the total population. Of which, the younger population demographic are more willing to invest in crypto, with the 18-34 age group being the highest at 18%.

To summarize, it can be predicted that with the passage of time, the public’s overall attention and acceptance level for crypto will continue to increase, and this is likely to attract more people into the market, driving strong growth across the entire crypto industry.

3) Increase in institutional investors’ participation is expected to drive more capital into the cryptocurrency market

There are an increasing number of institutional investors entering the crypto market, resulting in an increase in inflow of capital into the market.

Based on a June 2020 survey conducted by Fidelity Investments on US and European investors, among the 774 interviewed, 36% (US 27%, Europe 45%) of the respondents own crypto or crypto-related derivatives products, an increase of 14% compared to 2019’s 22%.
In May 2020, Paul Tudor Jones (a famous wall-street hedge fund manager) announced that he is going to allocate over 1% of his assets to Bitcoin, and his Tudor BVI fund (AUM over US$22b) might hold a single digit percentage of its assets in Bitcoin futures.
Established in 2013, Greyscale is the first SEC approved crypto fund. Till date, it has launched BTC, ETH, ETC and many other mainstream crypto investment trusts. As of 29 July 2020, Grayscale AUM has surpassed US$5.1b.

Greyscale is a closed end fund that is only available to accredited investors. As shown in diagram 10, 84% of the investors are institutional clients. Based on Grayscale’s continual growth in AUM, we can infer that institutional interest in crypto has been increasing.

The trend of institutionalization of crypto market is expected to continue.

There is an increasing number of institutional investors who are interested in crypto. Based on Fidelity Investment report, in the next 5 years, 91% of the institutional investors who are open to exposure to crypto assets in a portfolio is expected to have at least 0.5% of their portfolio allocated to crypto. In addition, with the spread of Covid-19, the global economy remains depressed, many countries have cut their benchmark interest rates or adopted negative interest rates to spur the economy. With such an economic backdrop, this trend will likely drive institutional investors’ acceptance of crypto and their willingness to invest in them to hedge against inflation risk.
With the constant improvement in the crypto industry infrastructure, the barriers to entry for institutional investors continues to lower. In October 2018, Fidelity established its new subsidiary, Fidelity Digital Assets. In March 2019, the company started to provide crypto custodial services for hedge funds, family offices, pension funds, endowment funds and other institutional investors. In May 2018, Coinbase launched its custodial services and acquired Xapo’s custodial services for US$55m in August 2019. In July 2020, the Office of Comptroller of the Currency (OCC) announced the Central Bank and Federal Reserve can provide crypto custodial services for customers.
The demand for crypto derivatives products among institutional investors is expected to increase. CME and Bakkt, along with its parent company Intercontinental Exchange, have a large number of institutional investors resources and is expected to launch new products based on the needs of institutional investors. CME and Bakkt have launched Bitcoin futures in December 2017 and September 2019 respectively. Since the launch, the open interest of Bitcoin futures on CME and Bakkt have continuously hit new highs. Since then, Bakkt and CME have also launched Bitcoin options at the end of 2019 and start of 2020 respectively. This shows that the demand for crypto derivatives by institutional investors is constantly diversifying.

Disclaimer

Matrixport provides this analysis as general information only. Matrixport accepts no responsibility for the accuracy or completeness of any information herein contained and Matrixport shall not be responsible for any loss arising from any investment based on any forecast or other information herein contained. The contents of this materials should not be construed as an express or implied promise, guarantee or implication by Matrixport that the forecast information will eventuate. The cryptocurrency market is highly volatile. Buying, selling, holding, or investing in cryptocurrencies or related product carries various risks and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before participating in the cryptocurrency market. Matrixport is not acting as a financial adviser, consultant or fiduciary to you with respect to any information provided. Any information available here is “general” in nature and for informational purposes only.