Lending and Borrowing
Nov 21, 2023

Bitcoin Derivatives Trading: Its Role, History, and Impact on Bitcoin Price

Notable events in the history of Bitcoin derivatives: Anecdotes, volatility and institutional involvement.

Bitcoin Derivatives Trading: Its Role, History, and Impact on Bitcoin Price

Bitcoin derivatives trading has become increasingly popular over the years. Derivatives are financial instruments whose value is derived from an underlying asset - in this case, Bitcoin. Traders use these instruments to hedge against fluctuations in the value of the cryptocurrency or to speculate on its price movements. This article delves into the evolution of Bitcoin derivatives, from the early days of Bitcoin options and futures to the growing adoption of bitcoin derivative on the lightning network. It also investigates the potential effects of Bitcoin derivatives trading on the overall price of Bitcoin, touching upon market manipulation, volatility, and institutional involvement. Throughout the piece, interesting anecdotes and notable events in the history of Bitcoin derivatives are highlighted, showcasing the dynamic and complex nature of this fast-growing financial sector.

Role of Bitcoin Derivatives Trading

Bitcoin derivatives trading serves a variety of purposes for different market participants. For institutional investors, it provides a means of hedging risk and managing exposure to the volatile asset. For retail traders, it offers an opportunity to profit from price fluctuations by leveraging their positions.

The History of Bitcoin Derivatives

Bitcoin derivatives trading can be traced back to 2011 when Bitcoinica, a now-defunct exchange, launched the first Bitcoin options. Founded by Zhou Tong, a then 17-year-old programmer, Bitcoinica allowed users to trade Bitcoin options, which were agreements to buy or sell Bitcoins at a predetermined price on a specific date in the future. However, Bitcoinica faced several hacking incidents and was eventually shut down in 2012.

2012: ICBIT and the Emergence of Bitcoin Futures

In 2012, ICBIT (now OrderBook.net) emerged as a new platform, offering futures contracts on Bitcoin. ICBIT allowed traders to speculate on the future price of Bitcoin, enabling them to hedge against price fluctuations. These early Bitcoin futures contracts were relatively simple, with limited liquidity and market participation.

2013-2014: The Rise of Bitcoin Derivatives Platforms

Between 2013 and 2014, several Bitcoin derivatives platforms entered the market, offering a range of innovative products. Coinsetter, a New York-based Bitcoin exchange, launched in 2013, providing margin trading and short-selling capabilities for Bitcoin. Another significant player, BitMEX (Bitcoin Mercantile Exchange), was founded in 2014 and quickly became popular for offering high leverage and perpetual swap contracts, enabling traders to bet on the future price of Bitcoin without expiry.

2015-2016: Regulatory Developments and Wider Adoption

As the Bitcoin derivatives market expanded, regulatory developments began to shape the industry. In 2015, the Commodity Futures Trading Commission (CFTC) in the United States classified Bitcoin as a commodity, clarifying its regulatory status and paving the way for more compliant derivatives products.

In 2016, the CFTC granted the first approval for a Bitcoin derivatives platform, allowing LedgerX to offer options and futures contracts on Bitcoin. This development signaled growing institutional interest and regulatory acceptance of Bitcoin derivatives.

2017: Mainstream Acceptance and Bitcoin Futures

The year 2017 marked a turning point for Bitcoin derivatives as two major US-based exchanges, CME Group and CBOE Global Markets, launched Bitcoin futures trading in December. These cash-settled futures contracts allowed investors to speculate on the price of Bitcoin without directly buying or selling the cryptocurrency, bringing a higher level of legitimacy and institutional involvement to the market.

2018-2019: The Expansion of Derivatives Products and Platforms

The following years saw an expansion in the range of Bitcoin derivatives products and platforms, with established exchanges like ErisX and Bakkt entering the market. Bakkt, launched by the Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, introduced physically-settled Bitcoin futures contracts in 2019, where contract holders receive actual Bitcoins upon expiry.

During this period, other platforms like Deribit, FTX, and Bybit gained prominence, offering a variety of products such as options, futures, and perpetual swaps with features like high leverage and auto-deleveraging.

2020-Present: Growing Institutional Adoption and ETFs

Institutional adoption of Bitcoin derivatives continued to grow in 2020 and 2021, as several high-profile institutions, including Tesla, MicroStrategy, and Square, entered the Bitcoin market. This increased institutional interest led to the approval of the first Bitcoin exchange-traded funds (ETFs) in various countries.

Over the years, numerous institutions in the United States have attempted to create a Bitcoin ETF (Exchange-Traded Fund) to provide mainstream investors with easier access to the cryptocurrency market. However, these efforts faced multiple rejections from the U.S. Securities and Exchange Commission (SEC). The SEC consistently cited concerns regarding market manipulation, inadequate surveillance measures, and the potential for fraud in the underlying Bitcoin market as reasons for denying these applications.

Some prominent examples of institutions that faced rejection include the Winklevoss twins' proposal for the Gemini Bitcoin Trust, SolidX's proposal in partnership with VanEck, and Bitwise Asset Management's application. Despite these setbacks, the persistent efforts by various institutions eventually led to the approval of the first Bitcoin futures-based ETFs in the United States in 2021.

Bitcoin Derivatives on the Lightning Network

LN Markets, launched a unique Bitcoin derivatives trading platform that can only be accessed through the Lightning Network. LN Markets is a non-custodial platform, meaning that users maintain control over their funds throughout the trading process. Users deposit and withdraw funds directly from their Lightning Network wallets, ensuring that their Bitcoin holdings are not stored on a centralized exchange, reducing the risk of hacks and other security concerns.

See what Apollo users think of LN Markets here:

Impact on Bitcoin Price

Bitcoin derivatives trading has a significant impact on the price of the cryptocurrency. By enabling traders to take both long and short positions, it helps maintain a balance in market sentiment, which can smooth out price fluctuations. Additionally, the increased liquidity provided by the derivatives market attracts more participants, thereby contributing to price discovery.

However, Bitcoin derivatives trading can also amplify price volatility. Leverage, a common feature in derivatives trading, allows traders to control large positions with relatively small amounts of capital. In instances of extreme market movements, liquidations of leveraged positions can result in rapid price fluctuations.

Interesting Anecdotes

  1. In May 2019, the price of Bitcoin skyrocketed by more than 20% in just a few hours due to a massive short squeeze. This event occurred when the price of Bitcoin started to rise, forcing traders with short positions to close their trades and buy back Bitcoin to cover their losses. The sudden surge in demand resulted in an even steeper rise in price, eventually causing a cascade effect and pushing the price even higher.
  2. In March 2020, during the peak of the COVID-19 pandemic, Bitcoin experienced one of its most dramatic price drops, falling over 50% in a single day. This event, known as "Black Thursday," was partly due to the liquidation of billions of dollars worth of leveraged positions in the derivatives market. The massive sell-off triggered panic and a sharp decline in the cryptocurrency's price.
  3. The Billion Dollar Liquidation: On April 17, 2021, Bitcoin's price experienced a sharp decline, dropping over 10% in just a few hours. This event led to the liquidation of more than $1 billion worth of long positions in the Bitcoin derivatives market, with the majority of the liquidations happening on the popular platform, Binance.


Bitcoin derivatives trading is a natural development in the growth and maturation of Bitcoin. It has enabled more sophisticated risk management strategies, provided liquidity, and facilitated price discovery. However, it has also led to increased volatility and added complexity to the market. Developments such as the integration of layer-2 scaling solutions, and the introduction of new financial instruments like Bitcoin ETFs and options are likely to shape the future of the market and contribute to its expansion and maturation.