The Development of Cryptocurrencies in the Derivatives Market
This paper addresses the question of what has been and what is the current state of the derivative market for cryptocurrencies. It provides a first insight into this field for a Financial Institution in Switzerland and provides useful information that will ease decision-making.
James Zurbrügg, 2018
Bachelor Thesis, Financial Institution
Betreuende Dozierende: Michael Ulrich
Keywords: Financial Institution, Cryptocurrency, Derivatives Market, Volatility, Money at Risk, Number of Market Participants, Value at Risk, Expected Shortfall, Illiquidity, Bitcoin, Ethereum, Litecoin, XRP, Bitcoin Cash, EOS, Stellar, Cardano, IOTA
In order to analyse the derivative market, first it had to be established what is required for such to succeed. A conceptual framework was developed based on similar cases of the past and scientific research, as there is no established theorem regarding cryptocurrencies. The framework has found three pillars that are a prerequisite for a derivative exchange to thrive, volatility, money at risk, and number of market participants. Hence, these three aspects were investigated
The measure for volatility was the standard deviation of the logarithmic returns. For money at risk, the value at risk and expected shortfall were selected. And as for the number of market participants, as this cannot be extracted easily, the focus was put on liquidity, or more precisely illiquidity. These were compared to two benchmarks. First, the Swiss Market Index as a representation of the Swiss market. Second, to Bitcoin before there were derivative products based on it in order see what values might be needed for an underlying to be traded on a derivative exchange.
This study found that, for the underlying, the return per percent of volatility is above the SMI for all cryptocurrencies but two. However, only two coins exceed the value of Bitcoin as the benchmark, Bitcoin and Ethereum. As for money at risk, all cryptocurrencies were above both benchmarks. None of the coins was found to be as liquid as the SMI, however, Bitcoin and Ether achieved a higher liquidity than Bitcoin as the benchmark. Thus, only Bitcoin and Ether were considered to be able to create a successful derivative exchange. This was supported by the findings that only Bitcoin currently has a derivative market in a globally connected financial system and Ether is being seriously considered. It has to be mentioned that there are currently other derivative products, mainly contracts for differences, for a range of cryptocurrencies. As those are only available through specialised platforms, they were neglected for this paper. As a consequence, the conceptual framework was judged to provide some added value to the discussion of what is needed to create a successful derivative trading, but should not be considered to be without fault.
Studiengang: Business Administration International Management (Bachelor)
Fachbereich der Arbeit: Banking & Finance
Art der Arbeit
Financial Institution, Switzerland
Autorinnen und Autoren
Sprache der Arbeit
Business Administration International Management (Bachelor)
Financial Institution, Cryptocurrency, Derivatives Market, Volatility, Money at Risk, Number of Market Participants, Value at Risk, Expected Shortfall, Illiquidity, Bitcoin, Ethereum, Litecoin, XRP, Bitcoin Cash, EOS, Stellar, Cardano, IOTA