Cryptocurrency derivatives space has been abuzz with activity in 2019. In traditional financial markets, the size of derivatives trading is ~4-5x of the size of spot trading. The success of BitMex has made it evident to everyone that the same phenomenon is likely to play out in crypto derivatives.
In this article, we do a comparative analysis of BitMex and Delta Exchange across several parameters to evaluate whether the underdog (Delta Exchange) can level up to the giant (BitMex).
BitMex has several innovations to its name, with the most notable among them perpetual swap. However, for the last 2-3 years, we haven’t seen any significant innovation coming out of BitMex. They continued to remain focused on the top handful of coins.
In addition to Bitcoin, BitMex has futures on 7 coins. The latest addition to this list was EOS futures which were listed in June 2018, more than a year ago.
In contrast, Delta Exchange has made product innovation its USP. Key among them are:
- Exclusive altcoin perpetual swaps: Delta Exchange currently list futures and perpetual contracts on bitcoin and 13 leading altcoins. Several of these altcoins, e.g. Tezos, ATOM, Chainlink and RVN are exclusive to Delta. This means that Delta is the only exchange where you could long/ short these altcoins with leverage. Delta has been quite responsive to traders’ demand for perpetuals on particular altcoins. The timely launch of BNB and LEO perpetual contracts helped the exchange win a
strong following among altcoin traders.
- Stablecoin settled derivatives: All contracts on BitMex are settled in Bitcoin. Single currency settlement enables traders to speculate on multiple coins with only bitcoin. However, this approach also has a significant downside: traders are forced to keep balances in BTC, i.e. stay long BTC, even when they are bearish on it. The USDC settled contracts of Delta Exchange are an elegant solution to this problem. By keeping their balances in USDC and trading USDC margined and settled contracts, traders are protected against BTC price volatility.
- Options and interest rate derivatives: Delta Exchange is in the process of launching new types of derivatives contracts. These include: (a) Options: The exchange plans to simplify the trading options through an innovative UI/ UX that enables a trader to articulate her market view and get suggested options trades to express that view. A preview of this novel way of trading options is already available on Delta Exchange’s Testnet, and (b) Interest rate swaps: These derivative contracts enable people to speculate on and hedge interest rate risks. Crypto lending, both centralised and decentralised, will benefit from access to interest rate swaps.
BitMex launched in late 2014 and as a leading incumbent enjoys a significant edge over Delta Exchange when it comes to daily traded volume.
However, it is the quality of order book, viz. bid-offer spreads and impact cost that matter more to traders.
In this aspect, Delta Exchange scores quite well. Let’s use the bitcoin perpetual contract that’s listed on both the exchange for our comparison. On both the exchanges, bid-offer spread is $0.5 and a position of notional value $100K can be acquired with minimal slippages. This indicates that for most traders, the quality of fills on Delta Exchange will be comparable to those on BitMex.
Matching Engine & Trading Infrastructure
BitMex’s Achilles’ heel has been its trading engine not being able to handle order traffic during volatile market conditions. A quick Google search is all that’s need to gauge the severity of BitMex’s system overload problem. Despite having significant resources at its disposal, the company has not been able to resolve this issue.
The matching engine of Delta Exchange has been written entirely in-house. The exchange clean track record in 1+ years of existence vouches for the robustness of the trading engine. Moreover, the Delta team has focused heavily on building strong risk management systems, which are critical for supporting leveraged trading of highly volatile alts. Another area where the exchange shines is advanced orders. In addition to supporting all the standard order types (market, limit and stop orders), Delta Exchange offers bracket orders. These let a trader better manage risk by enabling her to place an OCO (one-cancels-the-other) TP/SL at the time of placing an order.
A major risk vector for all centralized crypto exchange is losing crypto under custody in a hacking attack. Both BitMex and Delta Exchange have good track record in this area.
Neither of the two exchanges have suffered any loss of crypto due to hacking in its 5/1 year(s) history.
The security protocols of the two exchanges are also quite similar. Cryptocurrencies in custody are stored in multi-sig wallets. Withdrawals are processed only once a day with manual review.
Hot wallets that support automatic withdrawals are typically the weakest link in the security of an exchange.
Once a day withdrawals with manual review obviate the need for such hot wallets, although at the cost of speed.
Cryptocurrency derivatives is an attractive segment due to its immense growth potential. Considering the size of the prize, it is natural that several players will enter the space. We have already seen leading spot exchange and new project foray into crypto derivatives, to challenge the hegemony of BitMex. Delta Exchange is one such player.
Our four factor analysis shows that despite being new, Delta Exchange has been able to achieve near parity in 2/4 factors and seem to have a slight upper hand in the remaining two factors.
However, whether Delta Exchange can challenge BitMex for the top spot will be determined by two things: (a) Delta’s ability to continue to innovate on product and capture larger shares of traders’ hearts, minds and wallets and (b) state of altcoins: for the exchange’s bet on altcoins to pay off, altcoins (both in absolute and relative to bitcoin terms) do well. It will be interesting to see how this David vs. Goliath type of struggle will play out.