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Volatility Likely Not Over as August Crypto Derivative Volumes Pop

3 mins
Updated by Kyle Baird
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In Brief

  • Investors are moving to lower risk exchanges, and lower risk assets.
  • There has been a slight increase in fiat to stable coin transactions.
  • Independent and institutional investors likely expect volatility ahead.
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Crypto exchange derivatives increased in August, as did trade volumes on less-risky exchanges. After this week’s 10% drop in the bitcoin (BTC) price, many are wondering if the pain is over.
This month’s data suggest that at least the volatility is here to stay. If there’s one thing derivatives traders like, it’s volatility. Volatility means there are dramatic price changes. Dramatic price changes mean there are profit opportunities. Besides shorting the VIX volatility index, there are not many ways to make money in a steadily growing market, aside from diversified investing. For some traders, that’s far too boring.
stick figure poking bitcoin
Stick Figure Poking Nonvolatile Bitcoin | Source: Reddit
When stock market volatility hit a low in 2017, derivatives traders were more frustrated than ever. When bitcoin was trading steadily between $7000 and $9000, traders thirsted for price action. And whenever that happens, the “stick-poking bitcoin” memes return. Crypto derivatives traders were bored.

Enter February March… July, August

All that changed in February when Bitcoin and crypto in general, came to a bloody fall. As the pandemic ramped up, so too did crypto holders as they bailed into fiat and stable coins. But few could have predicted not only the recovery of bitcoin’s price, but a surge to touch a multi-year high. This occurred because of institutional investment, DeFi, DEXs, and other reasons. But, at the end of this run-up in August, the derivatives market started to shine.
chart with derivatives volumes
Derivatives volume spiked in August | Source: Cryptocompare via Bitmex

Comparing Apples to Apple Futures

Though trading volume did increase significantly in August, so too did derivatives markets disproportionally so, according to analysis from CryptoCompare. Derivatives volume in August increased faster than spot markets in crypto, accounting for 40% of the market. Binance derivatives markets alone increased by 74% in August.
chart of top v low tier exchanges
August saw higher volume on top-tier exchanges | Source: Cryptocompare via Bitmex
In general, volatility is championed by derivatives traders, so high volatility is often accompanied by derivatives volume. Thus, the higher derivatives volume in August points to continued volatility.

Safe Exchanges

Last month once again saw a retreat from crypto into to fiat or stablecoins. Nevertheless, the amount of money stashed in stablecoins in March, April, and May 2020, dwarfs this increase. Furthermore, most of this was transferred into USDT. A move into the most liquid of stablecoins suggests that traders are using this money as dry powder, and not for rent checks.
chart of fiat offloading
Crypto to fiat spiked in August, mostly into USDT Source: Cryptocompare via Bitmex.
While all this is going on, the CryptoCompare report shows that traders have moved their trades from riskier, less regulated exchanges into top-tier exchanges like Binance. Uniswap 7-day volume is down about 5x, from around $5 billion last week to approximately $1 billion this week. This suggests that people have had enough of high ETH fees and may signal the end of the Wild West Alt-Season. The trend, then, is that both contract and spot traders are still looking for trade opportunities. They may now simply be more conservative in their approach.
Uniswap decreased trade volume last week
7-Day Uniswap Trade Volume | Source: Uniswap

Institutional Crypto Perspectives

The CME futures help to give some perspective of where the market is. Since CME is highly regulated, it’s a relative measure of institutional interest. CME crypto futures increased 55.7% in August, above 200,000 contracts. This is in line with unregulated exchanges. Overall, the picture this data paints is that both independent and institutional investors expect volatility. With money moving into USDT, and crypto moving to higher-tier exchanges, it looks like the exciting times are not over yet. However, the next major price action may be relatively tame. Nonetheless, if a dark horse comes along, like a sudden adoption of an ETH scaling feature or spot exchange interface for Uniswap, it could ramp up a new alt season and get crypto lovers dreaming sky-high again.
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Harry Leeds
Harry Leeds is a writer, editor, and journalist who spent much time in the former USSR covering food, cryptocurrencies, and healthcare. He also translates poetry and edits the literary magazine