Decentralized finance (DeFi) refers to the use of blockchain to provide decentralized financial services that function as an alternative to services based on conventional technologies in the current global financial system. The DeFi system is constructed atop public blockchain networks such as Bitcoin and Ethereum to develop and operate financial decentralized applications (DApps). Although it has only been around for a year or so, the market capitalization of the DeFi system has already raked in US$500 million worth of Bitcoin (BTC) and Ethereum as of August 2019.
As an integral part of the cryptocurrency ecosystem, DeFi may be able to offer a solution to the fluctuations in crypto trading markets, due in no small part to the volatility of cryptocurrencies. Using the market price of Bitcoin (BTC) as an example, one BTC was traded at around US$1,000 at the start of 2017 but shot up to US$20,000 in early 2018, only to plunge to US$5,000 by mid-2018. In the Pulsar report, “The New Social Currency,” a significant correlation was made between social media activities and the market price of BTC. The results of data analysis carried out by Pulsar found that an increase of 10% in social media activities involving cryptocurrencies would lead to BTC trading prices rising by at least 5% over the next three days.
Volatility in cryptocurrency markets make them ideal for speculators and investors alike. What’s missing is an instrument that would allow crypto speculators to capture gains on the swings and for crypto investors to hedge their risk exposure.
DeFi’s latest offering of crypto futures has established itself as the financial instrument of choice for hedging risks related to cryptocurrency investments.
The rapid rise of crypto futures is self evident. As of October 2019, crypto futures trading achieved 50% the value of crypto spot trading. The following explores crypto futures, how it functions, and its entry into Southeast Asia.
A conventional futures option is an arrangement for a particular commodity or asset to be bought or sold at a predetermined price at a specified time in the future. On the crypto market, the underlying asset is a basket of cryptocurrency whose market price is being tracked under the investment structure. The basket will be bought or sold when the stipulated conditions are met. Given the prominence of Bitcoin, it’s little surprise that the most common crypto asset for futures is BTC. In addition to functioning as a speculative and hedging tool, crypto futures also promote the introduction of regulations and enhance market liquidity.
In November 2019, the Monetary Authority of Singapore (MAS) responded to the requests of institutional investors to introduce regulated financial investment products that would facilitate risk hedging of crypto investments and published a consultation paper for regulating crypto futures under the Securities and Futures Act (SFA). Under the proposed framework, crypto futures would be listed and traded on approved exchanges, of which there are currently four in based in the city-state: Asia Pacific Exchange, ICE Futures Singapore, Singapore Exchange Derivatives Trading, and the Singapore Exchange Securities Trading Limited. Following the paper’s publication, Intercontinental Exchange Inc (ICE) announced the launch of its Bakkt Bitcoin [USD] Cash Settled Monthly Futures contracts in Singapore, marking the arrival of crypto futures in Southeast Asia.
Across the Johor Straits, Malaysia has been making headway toward crypto regulation. In June 2019, the Securities Commission (SC) announced that it granted conditional approval for the registration of three recognized market operators (RMOs) — Luno Malaysia, Tokenize Exchange, and SINEGY Marketplace — to establish and operate digital asset exchanges (DAXs) in the country. The DAX RMOs were allowed a grace period of up to nine months to fully comply with all applicable regulations. Five months later, Luno Malaysia became the first fully regulated cryptocurrency exchange in the country when it successfully obtained a full license for its operations from the SC. The door had been opened for Malaysians to participate in the crypto market.
In general, the crypto market has undergone numerous ups and downs since its inception with the underlying goal of democratizing investment. In recent times, DeFi has come to the fore, spurring the use of blockchain in finance and investment.
Nonetheless, the unstable nature of the crypto market has put off traditional investors, particularly retail investors. Defi and crypto futures addresses that market volatility, opening the door to greater crypto trading in Southeast Asia and the rest of the world.
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