Derivatives have begun gaining a lot of traction in the world of cryptocurrency. They are interesting trading instruments, all things considered, although not every cryptocurrency is suited for them. This is why BitMEX is exploring the quanto option, which is a very different type of derivative.

The Quanto Concept

In some cases, the financial sector requires providers to step off the beaten derivatives path and launch a slightly altered version. A quanto is a derivative whose underlying asset is denominated in a currency which differs from that in which the instrument’s settlement occurs. Quantos are not that uncommon, although they have not existed in the cryptocurrency world for that long.

BitMEX’s Conundrum

One of the main reasons why BitMEX decided to introduce a quanto was the growing demand for Ether-based derivatives. It is not as simple as creating a Bitcoin derivative linked to the US dollar. Although this may seem strange on paper, the team has explained their reasoning behind this unusual development.

Instead of offering an inverse-style derivative featuring Ether, the team tapped into the quanto model. According to BitMEX, the “various exploits of popular Ethereum multisig smart contracts” do not allow for custodying Ether. That is very unfortunate, although companies such as BitMEX must limit their risk as much as possible.

Blaming the Ethereum protocol for terrible smart contract coding may be a bit of a stretch. Even so, the company is offering exposure to Ether through a quanto derivative for which Bitcoin is used as the margin and PNL currency. It is a viable ETHUSD contract, but it works very differently.

Looking Ahead

It will be interesting to see how the launch of this ETHUSD quanto derivative is received. Contracts pay out 0.0000001 BTC per USD, which could be of great appeal to speculators. Unfortunately for Ethereum, its price has been declining very rapidly over the past few days, making this a far less appealing market.

You may be interested

shares12 views

The Debate Over Bitcoin’s Dominance Re-Ignites As Markets Begin Recovery

Brian Evans - Mar 24, 2019

Signs continue to emerge that the bear market may finally be at an end, as values across the crypto space are inching upwards and a number of…

shares9 views

FEMA Data Breach Exposes Private Data of Nearly 3 Million Individuals

Brian Evans - Mar 23, 2019

A data breach has occurred within the Federal Emergency Management Agency (FEMA), resulting in the private data of nearly three million disaster victims being shared with an…

shares14 views

Litecoin Price Holds its own Above $60

Brian Evans - Mar 23, 2019

The top cryptocurrency markets are not necessarily performing as expected. That is completely normal behavior when Bitcoin turns ever so slightly bearish once again. It puts a…

Most from this category

%d bloggers like this: