2020 has been a devastating year as the COVID-19 pandemic continues to mount unprecedented challenges onto the global economy. The deepening global economic crisis has forced central banks worldwide to inject trillions of stimulus into the financial system, leaving investors scrambling for a hedge against the changing macroeconomic landscape. As such, investors have turned their attention towards alternative assets like cryptocurrencies and have pivoted Bitcoin as one of the year’s top-performing asset classes.
The derivatives market has been a beneficiary of this secular change, with volumes surpassing $4 trillion in the first half of the year. Open interest and liquidity across crypto derivatives markets have vastly improved, suggesting investors’ confidence in the sector. As such, 2020 has been a breakthrough for derivatives markets, leading to the meteoric rise of Binance Futures.
Foreword by Aaron Gong, VP Binance Futures
Dear Binance Futures Community,
One year ago, in the wee hours of September 9th, 2019, the entire Futures team gathered around my desk watching as I typed in our domain into the system - https://www.binance.com/en/futures/BTCUSDT.
Our hard work was building up to this one moment - countless all-nighters for more than six months. This was our first Binance Futures product: BTCUSDT perpetual futures at 20x max leverage. Functionalities only at its barebones - cross margin, with only Limit, Market, and Stop-Limit order available.
On the first day of operations on September 9th, we processed over 19,253 BTC, the equivalent of $170 million worth of futures contracts. It was a strong start and the rest, as they say, is history.
In less than 12 months, TokenInsight has classified us as one of three large comprehensive exchanges, with quarterly volumes over $200 billion. Today, we lead the market with the most extensive range of products, backed by a Nasdaq-level matching engine with all types of trading orders and tools - all to provide users with a holistic trading experience and top-notch customer experience.
As we celebrate our first anniversary, I would like to take this opportunity to reflect on our journey.
Why we launched Binance Futures
We launched Binance Futures to improve the industry’s status quo.
We found that through interactions with our Spot users, they encountered system overloads, inadequate risk protections, and unintuitive product designs on other derivatives exchanges.
Many of our core team members used to work in the traditional derivatives industry, and we were confident we could transfer our previous experience to build a better product to improve the users’ experience and advance the crypto derivatives industry.
We acknowledge that Binance Futures would be focused on the community first, and our core operating principle will always be user-centricity. We listen to feedback and design products accordingly - this is how we took the pole position in our first year.
A three-pronged strategy guided our development. First, our foundation must be strong. How high a skyscraper can be is determined by how robust its foundation is. At Binance, our foundation is our proprietary industry-leading matching engine. Since day one, we have spent tremendous efforts to build a Nasdaq-level matching engine that can process over 100,000 orders per second. To date, our matching has been stable and reliable, and tested across extreme market conditions.
Instead of devoting 1% to 100 different things, we dedicated 100% to one product at a time. This is the second component of our strategy - a one product focus approach. In our first few months, we focused solely on BTCUSDT perpetual futures. Our strategy paid off as the product consistently takes more than 30% market share today.
Third, blitzscaling to replicate our success rapidly. We introduced ETHUSDT and BCHUSDT pairs before the end of 2019 and accelerated our scaling throughout 2020. We now have 85 products across four categories, to help our users diversify. Most notably, users acknowledged our ability to balance both Bitcoin and Altcoins volume.
Building blocks of success
In this regard, we can confidently say Binance Futures has made a significant impact on the crypto-derivatives industry since we began a year ago. Today, the entire crypto-derivatives landscape is more competitive than ever as exchanges compete to offer the latest products and functionalities to attract users.
Binance Futures has grown tremendously and has consistently achieved numerous milestones along the way. The rise of Binance Futures has propelled it beyond some of the major players in the market. Today, Binance Futures is one of the leading derivatives exchanges in the industry, with over $900 billion in volume year-to-date.
Much of our success is attributed to our continuous efforts to introduce innovative products, enhance users’ experience, and at the same time, ensure a seamless and stable performance that users can rely on. Thus, we pride ourselves on building an industry-leading platform for our clients and improving the industry’s status quo.
This article reviews the key milestones that we have achieved in the past one year and studies the impact of Binance Futures on the crypto-derivatives landscape. We will conclude by analyzing the prospects of the crypto-derivatives industry and the long-term trends that could emerge in the foreseeable future.
The infinite future and beyond
Crypto never sleeps, and neither does our team. Everyone at Binance Futures works tirelessly, 16 hours a day, 7 days a week; this is how we are able to launch many new products and services in such a short period.
User-centricity and innovation are the core of our team’s principles and Binance Futures; we will keep working hard in this second year to prove our market-leading position, as we will continue to launch exciting products to grow our industry.
Since our launch one year ago, we have come a very long way, but this is just the start for Binance Futures, and just the start for Crypto Derivatives.
AG and the Binance Futures Team
Growing Binance Futures’ ecosystem
Our product offerings have expanded rapidly in the past year, providing ample options for users through various product lines such as USDT-margined futures, COIN-margined futures, Options, and Leveraged tokens.
On September 9th 2019, we launched our first flagship product, Bitcoin USDT-margined perpetual contracts. Since then, we have grown our portfolio of perpetual contracts to offer greater variety and diversification.
The USDT-margined perpetual contracts have been the backbone of our success. We began the year with just three contracts - BTCUSDT, ETHUSDT, and BCHUSDT. Today, the USDT-margined product line consists of over 51 contracts that generated more than $6 billion of daily volume in August.
In April, we entered the options market with the launch of Binance Options. Binance Options has gained traction among retail users due to its simplicity and short duration expiry, allowing users to capture short-term trends.
The following month, we introduced Binance Leveraged Tokens (BLVT), an innovative product designed to improve conventional leveraged tokens. BLVTs attracted tremendous interest since the beginning, and volumes have been growing by the day. Today, Binance Leveraged Tokens is the leading leveraged token product in the market with daily volumes twice larger than its closest competitor.
In Q2 FY20, we launched the second line of futures products, COIN-margined futures contracts, allowing users to trade and settle their futures contracts with the respective cryptocurrencies. This division of futures products complements Binance’s broad range of derivatives and creates more synergy within Binance Futures’ trading ecosystem.
Altogether, our product offerings as of 31 August consist of:
Quantity of contracts
Binance Leveraged Tokens
This wide selection of products provides users with greater variety and diversification for their portfolios.
How has Binance Futures shaped the crypto-derivatives market?
Before the launch of Binance Futures, the derivatives market was still at its infancy with only a small selection of derivatives products available and mainly concentrated within the large-cap cryptocurrencies.
In the second half of 2019, we entered the market and continuously improved and expanded the prevailing landscape. As such, the derivatives market today has evolved as competition grew intense, and volumes increased substantially with strong demand from retail and institutional participants.
Today, derivatives volume is more fragmented across several tier 1 exchanges, each hoping to capture a share of the fast-growing market.
Since the start of 2020, volumes across the industry have increased substantially. Volume in Q1FY20 alone is larger than volumes traded in its preceding quarters (Q3 & Q4). Total volume traded in the 2nd half of FY19 was approximately $1.98 trillion. In the first of 2020, trading volumes doubled to over $4 trillion. The volume growth coincided with increased volatility as experienced on several occasions this year.
Chart 1: Aggregated crypto-derivatives trading volume since 2019
Source: Binance Futures, TokenInsight
In 2020, the derivatives market matures with a broader product variety, such as options and leveraged tokens. These products offer alternative ways for users to gain leveraged exposure in the respective markets. Additionally, futures contracts offered on tier 1 exchanges now cover an extensive range of crypto-assets and are not limited to large-cap cryptocurrencies. With the rise of Decentralized Finance (DeFi) recently, exchanges quickly developed futures markets for DeFi investors to speculate and hedge risk efficiently.
Chart 2: Monthly volume across major derivatives exchanges
Source: Binance Futures
The second quarter of 2020 was a breakthrough for us as volumes grew leaps and bounds. In March, Bitcoin plummeted more than 40% in a single day and wreaked chaos across crypto markets. This caused many exchanges to suffer complete outages and unexpected downtime.
Throughout this unprecedented sell-off, Binance Futures performed resiliently amid a chaotic market environment. We continued to operate smoothly and users could transact in and out of the market without problems. This proved our infrastructure’s stability, paying back on our investments of building an unparalleled matching engine right from the start.
As users increasingly recognized the reliability of Binance Futures, we took a giant leap in market share and overtook one of the largest derivatives exchanges, BitMEX. In April, Binance Futures catapulted above BitMEX for the first time since inception as our market share increased from 18% to 26%. Meanwhile, BitMEX’s market share declined from 21% to 12%.
Our market share growth in this period indicated users’ confidence in our technical capabilities to handle extreme market conditions.
Chart 3: Market share across major derivatives exchanges
Source: Binance Futures
Since then, we have continued to grow and expanded our range of altcoin contracts. With the altcoin season in full force in late-July, we solidified our position as the leading exchange and climbed to the number one spot for altcoin futures, particularly for LINK and BAND contracts.
Key milestones achieved in our first year
Daily volumes on Binance Futures have since grown exponentially, and today, daily volumes averaged at $6 billion in August, which is approximately the size of the total volume processed in our first month of business.
Chart 4: Weekly volume on Binance Futures Year-To-Date
Source: Binance Futures
In July, we achieved a new milestone and marked an all-time high volume of $12.7 billion in a single day, this coincided with Bitcoin’s breakout above $10,000. The Bitcoin breakout signaled a new direction in the market as trading activity increased substantially after a quiet consolidation in June.
Chart 5: Monthly volume on Binance Futures Year-To-Date
Source: Binance Futures
The momentum continued in August, which was a significant month for us and the entire crypto community. Binance Futures ended the month with $195 billion in volume, its highest since debut. The accelerating growth in volumes was attributed to the rise of Decentralized Finance (DeFi), which also sparked a significant rally in large-cap cryptocurrencies such as Ethereum. DeFi has been one of the most popular trends in Q2 2020, with over $9 billion in assets locked in the ecosystem at its peak.
On Binance, we saw increased trading activity in DeFi-related cryptocurrencies, particularly in LINK, COMP, LEND, and our latest addition, DEFIUSDT - Binance’s first composite index product, allowing users to track and participate in the fast-growing DeFi market. As smart contract-based lending and borrowing ecosystems gain traction among investors, DeFi looks set to continue its upward trajectory in the coming years.
Open interest grows as derivatives markets mature
As volume grows, open interest grows in a similar fashion. Collectively, open interest across Bitcoin and Altcoin futures contracts has grown almost tenfold since the beginning of the year from USDT 137 million to over USDT 1 billion in August.
Chart 6 - Binance Futures’ open interest growth since inception
Source: Binance Futures
Open interest in Bitcoin futures contracts grew 350% from USDT 120 to 540 million, dominating half of the total open interest on Binance. This shows that Bitcoin futures contracts remain one of our most invested contracts even as new altcoin contracts were added over time.
Chart 7 - Bitcoin’s open interest dominance since inception
Source: Binance Futures
Binance Futures offers the most extensive selection of Altcoin futures contracts in the market. In aggregate, our open interest across Altcoin futures contracts grew from under USDT 20 million on January 1st to USDT 525 million - an expansion of more than 26 fold.
With growing open interest for both Bitcoin and Altcoins futures contracts, traders on Binance Futures enjoy better liquidity as market participation grows. This means that traders can transact orders efficiently and quickly with little or no price impact.
How has Binance Futures impacted Binance collectively?
Since our debut, Binance Futures has helped evolve the entire Binance ecosystem. From day one, futures markets have consistently generated higher volumes than spot markets. In the first quarter of 2020, total futures to spot volume on Binance was approximately 1.34 times. In the second quarter, the ratio grew to 3.08 times, indicating a growing demand for derivatives.
With volume now more dominant in futures markets, spot investors can refer to futures markets as a leading indicator of price movements and harness their predictive attributes to anticipate price risk better.
Source: Binance Futures
As shown in the chart below, Binance has emerged as one of the leading exchanges by volume in both spot and futures markets, positioning it as the industry’s go-to exchange. With the introduction of Binance Futures, users now have a complete ecosystem to fully utilize their crypto assets and manage risk in their cryptocurrency portfolio. This is possible with integrating both Binance’s spot and futures markets that enable traders to switch between both markets whenever trading opportunities arise.
Source: Blockchain Valley Ventures, Derivative Exchanges Market Landscape - Competitor overview and analysis August 2020
What does the future of crypto-derivatives look like?
The first exchange-traded futures contract was listed on CBOT in 1864, and it took more than 100 years for the first options contract to be listed on CBOE in 1973. Today, both futures and options markets have grown to such colossal size that daily volumes have surpassed $12 trillion and $3 trillion, respectively.
The crypto-derivatives industry, with an estimated $22.5 billion in daily volumes, pales compared to the sheer size of traditional markets. However, the crypto industry has seen more innovations than the traditional market at any given time in its short history of less than a decade.
For instance, the growth of DeFi has given rise to new opportunities and trends within the cryptocurrency ecosystem. The development in this sector is evidence that many other traditional finance concepts can be replicated within the crypto ecosystem in the long-run.
As we discover more ways of utilizing crypto for finance, the range of derivative offerings across large and small-cap cryptocurrencies will expand and evolve, possibly introducing entirely new ways of thinking about derivatives.
With increasing adoption over time, the question is, how much further will we advance in 100 years?