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 Nasdaq-listed Coinbase (COIN), a venue preferred by institutional investors, declined 12.8% to $51.5 billion.

Unlike spot 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 a proxy for traders, or speculative interest, while the spot market is taken to represent 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 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."

Leverage, not the spot market, fueled a crypto market July rally that restored $240 billion in market capitalization. While leverage boosts returns, it exposes traders to forced liquidations by exchanges it they 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 in May and the ensuing volatility in other cryptocurrencies with values pegged to the dollar or other external references.

CryptoCompare's report shows volumes for bitcoin-to-stablecoin tether (USDT) 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 concerning the pick up in bitcoin to stablecoin volumes.

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

Turnover in the crypto derivatives market jumped to $3.12 trillion in July. (CryptoCompare)