If the derivatives market were a planet, it would be Neptune. That is to say, it's a lot bigger than Earth.

How big an opportunity is the derivatives market?
It is almost unimaginably massive.
Total notional value outstanding is close to 15x world GDP.

As Outcome Trading approaches platform launch, we wanted to clarify the scale of the opportunity derivatives market represents.

Neptune?

The derivatives market is so large it is difficult to visualize. It helps to think of a gas giant 15 times the size of our planet, just as derivatives notional value is 15 times our world’s collective GDP.

Before we dig in to the size of this market, we need to define two terms:

  • Notional Value: This is the value on which the payout of the derivative is based. For example, a trade may be based on the change in value of $1 million in assets. But, depending on how much or how little the price of that asset changes, the payout of that trade could be a very small fraction of that $1 million.
  • Gross Market Value: Sum of the absolute values of all outstanding derivatives contracts with either positive or negative replacement values evaluated at market prices. So, if a trader is ahead by 2% in a trade with $1 million in notional value, and that is his only trade, his trades have a gross market value of $20,000.

So, when you read that the derivatives market has a notional value of $1 quadrillion ($1,000,000,000,000,000), realize that does not represent the amount money changing hands or even at risk.

Estimates of Size

As December 2023, the Bank for International Settlements (BIS) estimated the notional value of over-the-counter (OTC) derivatives in the market to be over $700 trillion. The numbers for 2024 are not in yet, but it is expected to be higher.  But these are OTC derivatives only. According to a CME report, exchange traded derivatives add, at minimum, another $70-100 trillion in notional value. Crypto derivatives data is harder to source, but just looking at recent data from CoinMarketCap, crypto derivatives volume appears to be well over $200 trillion per year. So, the total notional value traded likely exceeds $1 quadrillion.

The BIS estimates the gross market value of OTC derivatives as above $20 trillion. Assuming the same ratios as for notional value, we should expect gross market values in the overall derivatives market to exceed $30 trillion.

Crypto Derivatives Trading

The market for crypto derivatives has, obviously, become enormous. But it is also the market most in need of new solutions. While liquidations occur in every derivatives market, they are so common in crypto derivatives that they have become a major factor driving price moves.

The X account x.com/BXRekt tweeted every time there was a liquidation on BitMEX over a 6 year period. It tweeted over 270,000 times. And those were liquidations on only one exchange. Given the scale and how many exchanges there are operating on the same model, there are clearly many times that 270,000 number.

The level of high leverage and liquidations has led to multiple flash crashes. Just in the past 5 weeks, there have been at least three rapid drops that could qualify as liquidation-fueled flash crashes.

Each flash crash leads to massive losses. The most recent decline is estimated to have cost almost $1 billion to traders with liquidated long positions.

The Opportunity

This huge market, whose daily volume is approaching $1 trillion in notional value, is not serving its users well. Instead, it is feeding its users’ money to machine of liquidation hunters. (see our post on Stop Loss Hunters.)

The opportunity for disruption is enormous. The project or projects that fix these flaws and protect their users from liquidation will capture a large market share and reap massive rewards for early investors.


22.12.2024
Outcome Labs