Academy Company Updates Article

Alysa Xu: On Crypto Market, Derivatives, and Globalization

2020.05.20

COVID-19, the 3.12 market crash, Bitcoin halving, and now, we are almost stepping into the second half of 2020. We have been through a lot under the “new normal”, and yet, what have we learned about the market and what should we expect next? What can OKEx do better as we stand in the crypto space? Here are some of my thoughts on the crypto market, derivatives, and future planning of OKEx.

I. Correlation of the crypto market and traditional financial markets

Let’s first take a look at the overall market trend for the first half of 2020. From mid-February to early March, the global economy began to decline, and traditional market liquidity gradually shrank. At the same time, crypto markets lagged behind traditional markets, because the market sentiment was still buoyant due to the halving expectations.

On March 12, the crypto market suffered amid the global liquidity crisis. Coupled with the previous high leverage accumulation, Bitcoin plummeted to as low as $3,800 in one day. The extreme plunge triggered market panic, and the derivatives trading volume and positions dropped below the February level. And a gradual recovery followed as the global liquidity problem got alleviated. Looking back, we can see that the digital assets market is not entirely independent of the traditional markets. Because of their different natures, it takes time for the liquidity risk in latter to spread to the former.

This crisis, however, has also put bitcoin in the sights of more people. More traditional investors are paying attention to Bitcoin and have started investing in it, making the two markets more correlated.

Besides, no single market can be completely independent of others unless it is completely isolated. As long as there is an opportunity for arbitrage, traders take advantage to wipe out the spread and bring two different markets together.

All assets have their own bull-bear cycle, and Bitcoin is no exception. It can’t just go up all the time. Yet, looking at its long-term trend, there is a lot of room for the benchmark crypto to rise in the future. In the case of quantitative easing, in order to hedge against the risk of fiat currency depreciation, investors are bound to choose assets that can generate greater returns.

Advantages of Bitcoin over other assets

(1) After reaching its peak at $20k in 2017, BTC entered a bear market in 2018, started a slow climb in 2019, and is now still in a relatively reasonable valuation range at around $9k.

(2) Bitcoin’s overall market capitalization is less than $200 billion. As the volume is small, the overall effect of liquidity easing in this market will be faster and more obvious.

Overseas institutional investors were very active in the cryptocurrency market in the first quarter, with Grayscale, for example, investing a record $389 million in the quarter, buying about 60,000 Bitcoins, which is about 30 percent of the new Bitcoins mined in the quarter. Grayscale is currently holding a total of 310,000 Bitcoins, taking up approx. 1.7 percent of Bitcoins in circulation.

Also, looking at the chain data, the number of whale addresses holding more than 1,000 Bitcoins now stands at over 2,000, surpassing the 2017 bull market peak level, with three more addresses holding more than 100,000 Bitcoins. The number of addresses holding more than 0.1 Bitcoin also hit an all-time high of more than 3 million. In the long run, as bitcoin joins the ranks of major global assets, more people will take Bitcoin for asset allocation in the future.

II. The rapid growth of the derivatives market

Since the start of 2020, the derivatives market has been booming. We expect it will continue its rapid growth throughout the year. From Q1, the trading volume in the derivatives market exceeded $2 trillion, with 6.6 trillion spot trading volume. Derivatives trading volume was roughly one-third of that of the spot, with daily average derivatives market volume of $23.3 billion for the quarter, up 274% from last year, and spot volume rose about 104% year-on-year.

OKEx has been exploring the derivatives market for about 7 years. Currently, our one-stop platform provides the most comprehensive trading products, including perpetual, futures, and options contracts, all with margin options of USDT or other cryptocurrencies. OKEx has been leading the market in terms of trading volume and positions, head to head with Bitmex. As we constantly optimize and upgrade our products in terms of features and risk control mechanisms, we are now 1-2 years ahead of the industry.

First, we implemented an upgrade to the technical architecture to improve performance. As the digital asset market runs fast, the requirements for system concurrency, order processing speed, processing capacity are higher every day. Therefore, OKEx upgraded the Lightning System 2.0 and the super matching engine last year to make sure it can run stably even under extreme market conditions. Its system availability reached 99.999%, topping the industry level. Since the platform’s new system went live in 2019, there has been a qualitative improvement in the order processing speed. The order placing delay was reduced by 50% overall. At the same time, we launched tick-by-tick real-time market trackers for all trading products, meeting the needs of professional traders.

Second, we have a sophisticated risk management system. We have put the Tiered Margin Ratio System in place to optimize the algorithm for forced-liquidation and split order, and upgraded the calculation of marked price. At present, we maintain a record of zero clawbacks for the futures and perpetual swap trading market. And our insurance fund continues to grow, at present, it has close to 100 million dollars.

Third, our product range is comprehensive. In early 2018, we launched the perpetual swap trading, which now supports 15 major currencies; for futures trading, we added bi-quarterly contracts, and it supports margin options of USDT or other cryptocurrencies, making it very convenient for users to realize diversified investment strategies. In January, we also launched options trading, offering multiple expiry dates, rich execution prices, and over 100 contracts for traders. We also added three new features to help users understand more about options trading, including options discovery, options calculator, and Tick-by-tick real-time market trackers.

OKEx is the most diverse cryptocurrency marketplace in the industry, and we will continue to focus on strengthening system operations, improving user experience, and facilitating market liquidity in the future.

III. Full-cycle globalization layout of OKEx

I want to share a few more thoughts about our exchange, including our strategic positioning for OKEx.

Despite a decade of development, the most robust business model in the crypto ecosystem is still exchanges. After a lukewarm primary market, derivatives became the new hit. With regards to the developments of crypto exchanges, we can expect to see the following trends in the future.

First, the whole market will follow the 80/20 Rule, with first-tier companies occupying the main market share, and the second and third-tier platforms competing in the niche market.

Second, first-tier exchanges will build a richer and more comprehensive ecological system and become an integrated and one-stop service platform for crypto-asset products and services; while the second- and third-tier exchanges will focus on subdivided market.

Third, centralized exchanges will remain dominant in the industry for a certain period of time, but DEX will gradually evolve and the two is expected to complement each other.

Lastly, in terms of global markets, first-tier exchanges may be redefined. As some emerging markets are on the rise, such as Indonesia and Russia, where local exchanges account for almost 50% or more of the local market.

What about OKEx? We’ve been thinking of ways to better serve our existing users, but where are the limits of the market? How do we create a new market space? At our executive conference at the beginning of the year, we proposed a full-cycle global strategy that spans across all directions of our businesses.

On the other hand, we continue to expand globally. “True globalization” means localizing your product in each country to serve local users. It is a new challenge for us to take root in emerging markets as we have to get closer to the local culture, user habits, and understand the local market competitors.

As always, with an entrepreneurial mindset and being humble to learn, we never stop exploring new products and trends in the market. At the same time, we put our risk management system in the priority. In the balance between long-term development and short-term benefits, we will always choose the former.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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