During the 2017 bull run, initial coin offerings (ICOs) were extremely popular. However, in the last bull market of 2021, decentralized finance (DeFi) and yield farming took center stage. Now, as we enter a new bull cycle, 2024 is expected to bring a wide range of sophisticated financial products on-chain. From complex derivatives to structured products, the digital asset market will see the entry of big players and traders.
The crypto ecosystem has a tendency to follow the traditional financial market, known as TradFi. This is because Bitcoin (BTC) was initially created as an alternative payment system. ICOs even borrowed their name from traditional finance’s initial public offerings (IPOs) that date back to 1783.
Similarly, the DeFi ecosystem mirrors traditional financial services like lending, borrowing, and yield generation, but with a decentralized approach. Therefore, it is only natural that more complex financial instruments will eventually be developed on the Web3 platform.
The crypto derivatives market has already experienced significant growth. In November, derivatives trading volumes surged by 37.3% to $2.58 trillion, the highest since March. However, their share of the overall crypto market dropped from 79.9% in September to 73.3%. Additionally, open interest in crypto options has reached all-time highs.
In addition to this recovery, we are witnessing the emergence of more sophisticated derivative products, such as decentralized perpetual futures trading and innovative risk management mechanisms. This will be a key area for innovation in the coming year, alongside the launch of new complex products that mimic traditional counterparts.
Exotic options, structured products, and collateralized debt obligations (CDOs) are expected to see growth in the crypto space. While there have been some attempts at crypto CDOs, the market for crypto structured products is quietly gaining momentum. However, these complex products still represent a small fraction of the overall crypto market, indicating significant room for expansion.
There are three key drivers that will fuel interest in these innovative derivative products. First, growing institutional interest in digital assets will drive demand and innovation in this space. The traditional derivatives market has an estimated value that is 10 times the world’s total gross domestic product (GDP), with derivatives available for almost every asset imaginable. The crypto derivatives market will experience similar growth as sophisticated traders enter the space.
Second, as the nervousness caused by the crypto winter subsides, investors will once again seek high returns on their digital assets. However, this time there will be less interest in yield farming due to the high risk of hacks. Investors will turn their attention to derivatives and structured products, which offer the potential for sky-high returns along with downside protection.
After the collapse of various platforms in 2022, investors are looking for guarantees that their assets won’t disappear. This makes products with a degree of capital protection more attractive. Structured products often offer capital protection and even pay a guaranteed coupon, making them appealing to investors.
Structured products allow investors to make educated guesses on the future direction of their chosen underlying asset, such as Bitcoin. Even if the guess is wrong, the investor still gets their money back and walks away with a small coupon. This in-built protection is what made structured products popular in the traditional financial market. As the crypto market matures and investors seek more predictable returns, these vehicles will gain popularity once again.
As the market focuses on predictable returns and capital preservation, we can expect to see new launches in the on-chain structured product space and the development of complex derivatives projects. This will drive rapid growth in these areas and be one of the defining innovations of the current bull run.