Traditional Finance Institutions Entering Crypto Derivatives
Coinbase’s global head of derivative sales, Usman Naeem, believes traditional finance institutions are beginning to embrace digital asset derivatives for investment and hedging purposes. The Nasdaq-listed exchange, which acquired Deribit for $2.9 billion earlier this year, sees asset managers as the primary institutions waking up to globally regulated crypto derivatives.
These firms have fiduciary duties that require them to speculate or conduct strategies beyond simple liquidity provision, which distinguishes them from market makers. Naeem expects most of this activity to come from U.S. and European institutions, marking a significant shift from the current market composition.
Market Rebalancing from Asia to Western Institutions
Looking back at historical patterns, Naeem noted that more than three quarters of crypto derivatives activity has traditionally come from Asia. He anticipates this will rebalance as U.S. and Europe-based non-market maker institutions begin participating more actively in derivatives markets.
Coinbase’s evolution reflects this changing landscape. Starting in 2012 as a bitcoin on-ramp, the company captured much of the U.S. spot market. However, from 2017 onward, innovations like perpetual futures drove up to 85% of volume and liquidity outside the U.S., primarily to the APAC region.
Coinbase’s Strategic Acquisitions
In response to this geographic shift, Coinbase made strategic moves to position itself in regulated derivatives markets. The company acquired FairX in 2022, a derivatives platform registered with the CFTC, to offer U.S.-regulated futures. This was followed by the Deribit purchase in May, further expanding their derivatives capabilities.
The rebalancing isn’t just about geography—it also involves a shift in strategy approaches. Traditional money managers aren’t simply looking to buy $10-20 million worth of bitcoin. They want to scale up in risk-managed ways, using derivatives for hedging purposes.
Evolving Market Dynamics and Risk Management
As more long-term, risk-managed holders enter the space, Naeem expects to see volatility services that replicate traditional finance practices. Instead of pure speculation for large bitcoin rallies, institutions might sell some upside to fund insurance for downside protection. These dynamics could lead to more liquidity, stability, and a more understandable derivatives market.
When asked about recent volatility events like the flash crash that saw $7 billion in liquidations, Naeem pointed out that such incidents aren’t exclusive to crypto. He noted that industry infrastructure generally worked as designed during the event, with liquidation waterfalls functioning properly.
Perpetual futures operate differently than centrally cleared futures or spot markets, requiring tighter risk controls for position unwinding. The entire liquidation event occurred within about 12 minutes, which is actually quite remarkable when you think about the scale of the movements and the systems holding up under that pressure.
