How Does a Change in Custody Risk Influence the Futures Basis?
Increased custody risk, such as concerns over the security of a large exchange or protocol, can widen the futures basis. If traders fear holding the spot asset, they may prefer to hold the futures contract, driving the futures price higher (more contango) or, conversely, a fear of exchange default could drive futures prices lower.
Glossar
Futures Price
Valuation ⎊ Futures price, within cryptocurrency and derivative markets, represents a binding agreement to transact an asset at a predetermined future date and price, functioning as a standardized forward contract facilitated by an exchange.
Custody Risk Influence
Exposure ⎊ The degree to which a trading entity's net derivative position is dependent on the continued operational viability of a single or small set of custodians represents a significant unhedged exposure.
Decentralized Exchange
Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.
Regulatory Clarity
Regulatory Guidance on asset classification and operational requirements provides the necessary certainty for institutional capital to deploy significant resources into digital asset markets.
Exchange Default
Failure ⎊ An exchange default signifies a catastrophic failure of the central counterparty or custodian mechanism supporting crypto derivatives trading.
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.