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What to know about crypto derivatives in 2024: market, trends and risk

Despite the severe downturn in cryptocurrency since 2022, crypto derivatives markets continue to see new products and innovation in the works.

In brief

  • Despite the severe downturn in the cryptocurrency industry since 2022, including notable firm failures, crypto derivatives markets are expected to continue to evolve with the introduction of new products and innovations in decentralized finance (DeFi) protocols.
  • Crypto derivatives can be valued using the models we are familiar with from traditional finance (e.g., the classical Black-Scholes model for option pricing under the condition of no arbitrage, which is widely used by options market participants), with key modelling considerations taking into account the unique characteristics of underlying crypto assets.
  • Effective risk management for crypto derivatives is crucial due to the high volatility, leverage and complexity of these instruments. It plays a pivotal role in ensuring protection against significant losses and promoting informed decision-making in a rapidly evolving market.

Crypto derivatives market overview

The crypto derivatives market has seen remarkable growth, with the monthly volume in September 2023 hitting $1.33 trillion, significantly exceeding the spot market. Bitcoin and Ethereum are the most frequently referenced assets in crypto derivatives.


The crypto derivatives market can be bifurcated into a centralized derivatives market and a decentralized one. For centralized derivatives, non-US markets lead in trading volume, while in the US, CME is the predominant player with over 60% market share of the monthly derivative trading volume in the US as of September 2023. The decentralized derivatives market, though smaller, is gaining traction for its security and transparency, with dYdX protocol being a major player in DeFi derivatives.


Despite regulatory pressures and market challenges, crypto derivatives are poised for growth, with innovative products such as Crypto.com’s UpDown options, Luxor Technology’s Hashprice non-deliverable forward (NDF), and FalconX’s staking yield swap.


Crypto derivatives products and valuation considerations

Various types of derivatives products, each with distinctive features and valuation methods, underscore the complexity and innovative nature within the crypto market, implying a future rich with potential for both risk and reward.

Innovative products are continuously evolving in the crypto derivatives market, offering unique hedging and investment options. Below, we discuss three notable examples.

Crypto derivatives risk management 

While crypto derivatives offer a way to invest in crypto assets indirectly, they entail various risks requiring meticulous management. 

The lifecycle of trading crypto derivatives primarily encompasses important risk types including, but not limited to, market risk, counterparty credit risk, liquidity risk, operational risk, legal and compliance risk, which in turn demand detailed risk calculations and models, such as value at risk (VaR) and funding valuation adjustment (FVA). All these risks emphasize the crucial need for robust controls and a comprehensive risk management approach when trading and managing crypto derivatives. Crypto derivatives risk modelling also faces unique challenges stemming from the characteristics of the underlying crypto assets with respect to high volatility, 24/7 trading, legal enforceability, crypto collateral management, regulatory considerations and market concentration, necessitating careful modelling considerations.

How Ernst & Young LLP can help

We offer extensive support for crypto derivatives valuation and risk modeling and management, adhering to industry practices and regulatory requirements. Our services encompass:

  • Development, enhancement and implementation/integration of models
  • Testing and documentation of models
  • Validation and ongoing monitoring of models
  • Dynamic lifecycle transformation of models, including optimizing strategies and adopting agile modeling approaches
  • Regulation compliance support
  • Risk identification, measurement, management and reporting

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Seha Islam, Senior Manager, Financial Services Risk Consulting, contributed to this article.


In the dynamic world of crypto derivatives, we are witnessing evolution despite market downturns, with bitcoin and Ethereum at the forefront. These derivatives, spanning traditional finance – like options and futures to novel products such as perpetual swaps, UpDown Options, Bitcoin Hashprice NDFs and staking yield swaps, are reshaping investment and hedging strategies. Traditional valuation methods are adapted to the crypto market’s unique volatility and continuous trading. They also bring complex risks, which demand robust, crypto-specific risk models, accounting for high volatility, legal uncertainties and market concentration.

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