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Cryptocurrency Exchange FTX Derives More Profits from Regulation

  • FTX.US has agreed to acquire LedgerX for an undisclosed sum, a move that’s set to expand the crypto exchange’s product offerings to futures and options trading in the U.S.
  • The acquisition is well in line with FTX CEO Bankman-Fried’s frequent advocacy of regulatory engagement.

To understand the power of derivatives, let’s do a simple bit of math. Now assume that a stock costs $1 today and you expect that it will be worth $2 by the end of the month, wouldn’t it be great if you could pay just 10 cents for the option to purchase that stock for $1 today, and have the luxury to only exercise it at the end of the month?

Your profit would amount to $2 (selling the stock in the market if it hits that price) – $1 (cost of stock after exercising the option) – $0.10 (cost of the option) = $0.90

Now if you were able to buy that option at just $0.10 and the market had played out as you expected, you’d have made a cool $0.80 on your investment, or eightfold your outlay.

The reality of course is far more complex, because markets don’t always move in the direction that we expect and options aren’t always priced the way we want, which is why traders make so much more money by writing options and selling them and so many of them expire worthless.

But as tools for hedging and trading, options, futures, swaps and the family of other instruments known as derivatives are indispensable.

Which is why cryptocurrency exchange FTX’s acquisition of LedgerX is so significant.

Contrary to popular belief, the bulk of cryptocurrency transactions don’t revolve around the underlying asset, but through derivatives.

Given how most of the cryptocurrency space is unregulated, traders can obtain massive amounts of leverage to speculate on any manner of digital asset.

But as regulators have circled around major cryptocurrency exchanges like Binance, there has been increasing pressure to offer access to regulated forums to trade and transact in digital asset derivatives.

While FTX has an offshore cryptocurrency exchange that is not regulated, FTX.US is, and seeks to offer investors in the U.S. access to derivatives trading as well through its acquisition of LedgerX, a regulated cryptocurrency derivatives exchange and clearinghouse.

Unlike the CME which offers cash-settled cryptocurrency futures, LedgerX offers physical settlement of all contracts, as well as algorithmic trading for institutional investors such as family offices who may not have that in-house capability.

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© Copyright of Novum Global Consultancy Pte Ltd {2020, 2021}. All rights reserved.

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