Derivatives have begun gaining a lot of traction in the world of cryptocurrency. They are interesting trading instruments, all things considered, although not every cryptocurrency is suited for them. This is why BitMEX is exploring the quanto option, which is a very different type of derivative.
The Quanto Concept
In some cases, the financial sector requires providers to step off the beaten derivatives path and launch a slightly altered version. A quanto is a derivative whose underlying asset is denominated in a currency which differs from that in which the instrument’s settlement occurs. Quantos are not that uncommon, although they have not existed in the cryptocurrency world for that long.
One of the main reasons why BitMEX decided to introduce a quanto was the growing demand for Ether-based derivatives. It is not as simple as creating a Bitcoin derivative linked to the US dollar. Although this may seem strange on paper, the team has explained their reasoning behind this unusual development.
Instead of offering an inverse-style derivative featuring Ether, the team tapped into the quanto model. According to BitMEX, the “various exploits of popular Ethereum multisig smart contracts” do not allow for custodying Ether. That is very unfortunate, although companies such as BitMEX must limit their risk as much as possible.
Blaming the Ethereum protocol for terrible smart contract coding may be a bit of a stretch. Even so, the company is offering exposure to Ether through a quanto derivative for which Bitcoin is used as the margin and PNL currency. It is a viable ETHUSD contract, but it works very differently.
It will be interesting to see how the launch of this ETHUSD quanto derivative is received. Contracts pay out 0.0000001 BTC per USD, which could be of great appeal to speculators. Unfortunately for Ethereum, its price has been declining very rapidly over the past few days, making this a far less appealing market.