When discussions about ALL the money moving to the blockchain come up, it’s important to include the derivatives market (estimated to be ~ $1 QUADRILLION).
A derivative is an investment contract that is derived from the value of an underlying asset (like a stock, bond or currency).
Options are an example of a derivative. Using an options contract, you could make an agreement to buy a stock on a certain date at a certain price.
This agreement is based on the value of an underlying asset (which is a stock in this example).
Derivatives can be used as a hedge against risk.
Let’s say you needed to buy corn for your business 3 months from now.
Rumors are flying that there are shortages, which could increase the price.
If you had a futures contract on corn (which enabled you to buy corn in 3 months at a specified price), it could help minimize your risk of having to pay more if the price goes up.
Credit default swaps are a derivative that functions like a form of insurance. When a lender issues a long term loan (30 year mortgage), the borrower can’t guarantee that they will be able to pay back the loan (30 years is a long time).
To hedge against the risk of default, the lender can package a group of loans together, and take out insurance from a third party.
The risk of default is “swapped” to another party.
Because there are an infinite number of contracts that could be created on top of underlying assets, the derivatives market is much bigger than markets like stocks and bonds.
It’s important to note that most derivative investing is done using leverage (borrowed money).
This makes the potential upside great for an investor, however, the risks to the downside are larger as well.
The products in the derivative market can also be complex and difficult to understand, which introduces an additional element of risk.
The 2008 financial crisis was in part due to credit default swaps taken out on a large scale against mortgages that went into default.
When the financial system moves to the blockchain, which would includes ALL the money, the total value could easily exceed $1 QUADRILLION dollars.
The current marketcap of digital assets is $1T, so this would increase the market by 1000x.
This assumes that all markets make that transition, which is not yet known.
Some derivatives products are simply speculative gambling and may not continue in the new system.