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Traders’ new fancy: Crypto F&O

A Gurgaon-based trading firm, Vommafi Technology, backed by family offices, started allocating funds to cryptocurrency futures and options (F&O) in early 2024. Today, this allocation constitutes 30% of their overall portfolio, said one of the traders who is making $1 million (~Rs 8 crore) daily turnover out of crypto F&Os.

Indian traders seem to have a new favourite in crypto F&O with major exchanges like CoinDCX and Delta Exchange witnessing a surge in volumes.

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Global crypto derivatives exchange Delta Exchange which recently registered in India said it has already touched peak trading volumes of $300 million in Bitcoin and Ethereum derivatives in a single day. CoinDCX, which offers crypto futures, is expected to record almost $50 million of their daily trade volumes coming from futures, as per some estimates. Overall, the market is estimated to fetch a trading capital of $100-$150 million per day. Meanwhile, others are also exploring to launch their F&O offerings soon, people close to the companies said.

But, regulatory uncertainty still persists over taxation of these F&O offerings, as investors are escaping the 1% TDS which the government levied on crypto spot trading.

F&O Frenzy

“India has one among the highest populations of 4 million equity derivatives traders today, with volumes far exceeding the spot volumes,” said Pankaj Balani, CEO and co-founder of Delta Exchange. “We want to cater to this cohort of investors who wish to diversify in crypto F&O with superior technology, abundant liquidity, insurance, risk management and liquidation system to protect the interest of traders.”

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“Globally, we have witnessed an yearly growth of 160% and we are confident that volumes on our India platform will cross $1 Billion in daily notional traded before the end of this year,” Balani said.In simple words, a futures contract is a legal agreement to buy or sell a particular asset at a predetermined price at a specified time in the future, whereas options give the buyer the right to buy or sell but not the obligation.

Here’s an example, trader A wants to invest a capital of $100 and is bullish on BTC. He goes long on the BTC/USDT Futures contract with a 10x leverage. He now holds a contract worth $1000, with a margin of $100 and a loan of $900.

Leverage is pretty high in crypto derivatives. For instance, CoinDCX offers up to 15x leverage on over 16 USDT trading pairs. Comparatively, in equities traders can leverage upto 5x.

While this may appear attractive, if not hedged carefully it could cause ‘hard liquidation’ or complete capital wipeout.

India is already the largest market of derivatives trading in the world. According to Axis Mutual Fund, equity derivatives account for a staggering 99.6% of market volumes, totalling over US$4.3 trillion per day.

Naturally, these investors with high risk appetite will have an inclination towards crypto, which in fact, offer higher volatility and premiums than any other underlying asset class.

“It is a high risk and high reward investment, which allows investors to hedge against market volatility and potentially amplify returns through leverage and also poses risks of liquidations,” said Edul Patel, CEO of cryptocurrency exchange Mudrex. “Hence, it is also important for investors to understand the higher risks involved, as leverage can magnify both gains and losses.”

Vommafi Technologies’s trader mentioned above said that the reason he started allocating capital to Bitcoin and Ethereum F&Os is because of higher premiums, 24-hour trading opportunity and lower hedging costs.

“If you see right now in the NSE index BANKNIFTY and NIFTY are very cheap compared to the kind of risk-adjusted returns they are providing. So because the premiums are really cheap, it was very important for me to shift towards crypto underlying for a higher premium which means higher ROI (return on investment).”

He explained that because of uncertainty, implied volatility of crypto derivatives is very high.

For instance, According to The Block, implied volatility of Bitcoin options has ranged between 40%-77% since the start of this year. Whereas for Ethereum options, volatility was as high as 91.62% in June. When compared to equities, the implied volatility for NIFTY 50 options has remained between 13%-25% during the same period.

He added that because crypto exchanges operate a 24-hour market, his hedging costs are also cheaper compared to equity or any other form of derivatives.

The Tax Trap

Although globally, derivatives trading volumes on major centralized cryptocurrency exchanges are to the tune of $35-$40billion – double of spot volumes – Indian exchanges could far exceed this multiplier even if a handful of traders start allocating capital in crypto futures, experts say.

But the largest hurdle to participation of large traders, institutions, HNIs and fund houses in this segment is regulatory uncertainty over crypto legitimacy in India and application of Section 194S of the Income Tax Act on crypto F&Os.

“Although the Income Tax Act has imposed 1% TDS (tax deducted at source) on exchange of virtual digital assets (VDAs), some exchanges take the view that since future trading involves a trader to take a bet on a financial contract, which is backed by a VDA (such as a Bitcoin) without actually having to trade directly in VDAs, such transactions are freed from the 1% TDS applicability,” said Navdeep Bidwan, Senior Associate, AZP & Partners.

“However, nowadays the majority of the exchanges that offer trading in the futures permit margins to be paid only in USDT or commonly known as stable coin and not in cash, thereby attracting the TDS liability. In summary, the Indian tax landscape for VDA futures is definitely nuanced,” he explained.

ET spoke to five large traders in Mumbai and Delhi who concurred that they would rather stay away from cryptocurrencies or their derivatives than suffer any future implications.

However, Delta Exchange’s Balani said that spot and derivatives markets should be treated differently.

“In our vertical, there is no actual exchange or selling of cryptocurrencies and so TDS does not apply. Having said that, since there is trading and there will be gains and losses, people will have to pay income tax on those,” he said.

Content Source: economictimes.indiatimes.com

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