Crypto Derivative Trading Volume Rose for First Time in 4 Months as Market Rallied in July

The value of crypto derivative contracts traded rose 13.4% last month from June, the first uptick since March, CryptoCompare said.

The London-based data aggregator and index provider said $3.17 trillion worth of the contracts changed hands in July, while turnover in the spot market fell 1.34% to $1.39 trillion, the lowest level since December 2020. Spot trading volume on the Coinbase (COIN) crypto exchange, a venue preferred by institutional investors, declined 12.8% to $51.5 billion.

Unlike spot trading, trading derivatives offer leverage. While that allows investors to control a sizable contract value with a relatively small amount of money and increase their potential profits, it also increases their risk. Market observers consider derivatives market activity as a proxy for traders, or speculative interest, while the spot market is seen as representing long-term investors.

"The rise in derivatives trading volume indicates an increase in speculative activity as traders believe there is room for further upside in this rally, with no Federal Open Market Committee meeting scheduled for next month," CryptoCompare said in its monthly report. The rate-setting FOMC will meet in September, but not in August.

"The increase in derivatives trading volume was also amplified this month as traders speculated on the impact of the Ethereum Merge and potential hard forks on Ethereum," the report said of July.

The use of leverage, not spot market trading, fueled a crypto market rally in July that restored $240 billion in market capitalization. While leverage boosts returns, it exposes traders to forced liquidations by exchanges if the traders can't meet margin shortages. Therefore, derivatives-led rallies like July's often inject volatility into the market. That said, overall leverage still remains low compared with early 2021.

Another key takeaway from the report is that there was no shortage of people chasing stablecoins despite the collapse of Terra's UST stablecoin in May and the ensuing volatility in other cryptocurrencies with values pegged to the dollar or other fiat currencies.

CryptoCompare's report shows the volume for bitcoin-to-stablecoin tether USDT$1.0003 spot trading increased 31.5% to 8.78 million BTC in July. Bitcoin spot trading into binanceUSD (BUSD) surged 80.2% to 2.13 million BTC, surpassing bitcoin-to-U.S. dollar turnover for the first time on record.

"Investors continue to prefer safety under macroeconomic conditions," CryptoCompare noted about the pickup in bitcoin-to-stablecoin volume.

The crypto market valuation on Thursday rose to a two-month high of $1.17 trillion, extending July's recovery. Volume could pick up further in coming weeks as the supposedly bullish Ethereum Merge is due in mid-September.