Su Zhu, CEO at Three Arrows Capital recently spoke about the crypto derivatives market in Invest Asia 2019 event held in Singapore and expressed his opinion about market sentiment movement regarding BTC lending platforms.
According to Su Zhu, the crypto derivative space was a “growing, nascent segment of the market” and the development of the space was directly tied to the fundamental growth of crypto assets [BTC].
Talking about “crypto derives”, he explained that these financial instruments that are tied to an underlying asset [Bitcoin, in this case], would either be in contango or backwardation. Contango meant the forward prices of a futures contract is higher than spot prices whereas backwardation indicated the complete opposite, where future prices will be marked lower than the spot valuation. Over the past couple of years, crypto derivatives had spent an equal amount of time in both the situation.
The main use of crypto derivatives as indicated by the media is usually speculation, where people trade on 5x, 10x, 50x, etc, etc leverage but Su Zhu mentioned that the liquidity and volume generated in this space had opened up more fundamental use cases for the community.
One of the use cases explained by Su Zhu included locking up the monetary value on the individual investment. He said,
“Not a lot of people want to move around large amount of Bitcoin due to tax issues and others host of issues, so they prefer to send their BTC to an exchange like BitMEX or Deribit, where they short Bitcoin there through derivatives and lock in the dollar value of their portfolio.”
He also mentioned traders working with “Bitcoin collateral” where people needed to own BTC in order to run their business. Such traders would go on BitMEX, which only accepts BTC as margin, and they would immediately buy BTC while then sell a derivative to acquire the original dollar position.
Su Zhu underlined the advantage of crypto derivatives here and suggested that people could acquire leverage from the market itself rather than going through systems like home equity loan, personal loan or a credit card loan. He stated,
“That is the big innovation with crypto derivatives, which is not with these PDC bars, they can access the pool of people who want to yield on BTC. They can sell that to Fiat and pay off expenses and at the same time they can hedge that out so that, if the coin goes 10X, they can still return that capital to their lenders.”