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FTX.US, the American affiliate of billionaire Sam Bankman-Fried’s global cryptocurrency exchange FTX International, is betting that it can leverage a similar playbook to its parent company and successfully compete in the ever-crowded U.S. market. Specifically, it is going to start offering crypto derivatives to clients.
Announced today, the one-year old exchange has agreed to acquire the parent company of LedgerX LLC, a Commodity and Futures Trading Association (CFTC)-regulated crypto derivatives exchange, for an undisclosed sum. Derivatives are financial instruments, such as futures, whose price is based on the value of an underlying asset. LedgerX currently offers futures, options, and swaps on bitcoin and ether.
If the deal closes, which could happen as early as October, FTX.US will be able to offer U.S. clients a distinct product line from industry heavyweights such as Coinbase, Kraken, or Gemini.
“We want to plant our flag in something that is uniquely ours,” says Brett Harrison, CEO of FTX.US. “Going into the derivatives market is such a natural extension…FTX International has two years of running an exchange with $500 billion monthly volume in derivatives without seeing serious liquidations or having nearly any downtime. It feels like this is clearly within our wheelhouse.”
It is fortunate that FTX.US has this playbook to draw on, as it is still looking to make a major impact in the ever-competitive and crowded American crypto spot market. The exchange is growing fast. Harrison said that in January 2021 it averaged $1 million worth of spot volume per day, yet over the last 24 hours that number has risen to over $350 million, according to CoinGecko. Still, this is a small fraction of the daily volume seen by Coinbase ($4.6 billion), Kraken ($1.2 billion), or Binance.US ($1 billion). Binance.US is the American franchise of Binance.com, the world’s largest cryptocurrency exchange. These numbers do not also take into account the rapid growth in crypto trading volume seen by PayPal, Square, and Robinhood in recent months.
The market for regulated derivatives in the U.S. is much less crowded. The major player is the Chicago Mercantile Exchange (CME), which currently has $1.63 billion of open interest (unsettled contracts) in bitcoin futures. It also offers ether futures and bitcoin options. However, if we remove the U.S. geofence, the market becomes much denser and competitive. FTX International is the third-largest derivatives exchange in the world with $2.3 billion, but it is still far behind Binance ($4.15 billion). LedgerX does not factor into the top 10. CME was briefly the largest in the world in terms of open interest this past winter, but it has since fallen to the fifth position.
Exchange BTC Futures Open Interest ($bn)Skew
So, even in the less-competitive U.S. derivatives space FTX.US will have some catching up to do. The question then becomes who will be doing the trading, which is important because crypto derivatives products have been scapegoated by some in the industry for accentuating market movements and causing rapid price downfalls.
Harrison says that the customer bases between FTX.US and LedgerX share similar profiles (70% institutional, 30% retail), suggesting that institutions such as hedge funds and proprietary trading firms will be the ones primarily purchasing these products. However, LedgerX specifically targets the retail industry with some of its offerings, such as small contracts like its bitcoin mini (worth 0.01 BTC – $469) and educational videos designed to help retail investors get started with these products.
When asked about the value and need for such products given the already volatile nature of crypto, Harrison pointed out that contrary to some negative opinions, derivatives (crypto or otherwise) are an efficient and necessary tool for healthy markets. “They are much more efficient means of trading when your two parties are interested in having financial exposure to a particular asset but aren’t so interested in necessarily holding that asset or at least holding that asset immediately.” He also noted that this is especially valuable in crypto, where many people remain apprehensive about individually securing these assets. This sentiment was also shared by Sam Bankman-Fried in a recent interview with Forbes.
Harrison also explained that while the company has future plans to merge the two operations’ product offerings, it will be conscientious regarding specific customers that can trade these products. He wants to convey a degree of seriousness with the platform and not promote a ‘gamified’ experience. “It is important to make it clear from the beginning that this is a trading platform…it’s not a game with which to risk everything. And that’s not our goal. We want people to trade safely and responsibly.”