Crypto options: As the cryptocurrency market matures, there are now many new financial toys available to play with.
Crypto trading has grown from strength to strength over the past few years. In 2020, the market size was valued at a respectable $1.49 billion. But, it is projected to scale up and reach a price point of $4.94 billion by 2030, growing at a compound annual growth rate (CAGR) of 12.8%.
More investors have continued to make their way into this flourishing space. As a result, a number of crypto-centric trading tools have emerged and gained mainstream traction. These allow users – much like in the traditional finance sector – to indulge in various crypto-centric trading activities seamlessly.
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Crypto options: What are ‘options contracts’?
A stock option can be described as a financial offering that provides an investor with the right to buy or sell a stock at a predetermined price and date. In terms of how these novel tools are traded traditionally, options are bought or sold as part of a time-bound setup. This could be as short as a day or as long as a couple of years.
Quite like other derivatives-based tools (such as futures, credit default swaps, amongst others) stock options represent novel financial contracts. These allow traders to speculate on the price of an underlying asset. Options allow for settlements to take place in the lieu of various fiat assets as well as cryptocurrencies.
Crypto options: What are they?
When an individual buys an option, they have the right to trade its associated/underlying asset. This is without being obligated in any way to do so.
In layman’s terms, crypto options trading works in much the same way. An investor is required to pay a premium. This is done to acquire the “right” to buy/sell an agreed amount of crypto (eg: Bitcoin, Ethereum, etc) on an agreed-upon date. There, the cost of an option is usually referred to as a “premium.”
Types of Options
The trading landscape has continued to evolve over the years. Therefore, there have been two styles of options that have emerged and entered the consciousness of the mainstream masses.
American-style contracts: Investor has the right to exercise the option at any time, i.e. even before the expiry of the contract.
European-style contracts: The European contract allow their owners to exercise the contract only after their expiry. That said, European-style options are only executable upon their expiry. Although, they can still be traded or closed out at an earlier time by their owner.
There are two different types of options contracts, call and put.
Call Option: Gives an investor the power to acquire the underlying asset at a predetermined price point (also referred to as ‘strike price’).
Put Option: Gives the buyer the ability to trade/sell off an asset at a fixed strike price.
An in-depth look at how crypto options work
Let’s assume that the value of a single bitcoin at the start of 2022 (e.g. Jan 1) stood at $24,000. However, ‘Investor A’ is convinced that by the end of Feb. this number will be much higher. He decides to acquire 10 European-style call options. This is at a fixed rate of $26,000 for a 0.002 bitcoin premium per contract — scheduled to expire on, let’s say Mar. 1.
Mathematically speaking, 0.002 bitcoin at a sum of $24,000 per token works out to $48 at the time Investor A decided to purchase the above said call options (10 x 68 = $480).
Now each contract provides the investor with the ability to acquire 0.1 BTC at a fixed sum of $26K per token. Therefore, Investor 1 can potentially buy 1BTC for 26,000 when his contract expires.
That said, there are two possible events that can play out:
Case 1: If upon expiry, BTCs value stands at $30,000, Investor A can execute his contract and make a flat $4,000 profit ($30,000-$24,000 = $4,000) minus the associated premium of $480.
Case 2: If upon expiry, BTCs value is at $22,500 for example and Investor A forgoes his call option, he loses the premium ($480) he had to shell out.
Crypto options: Where can you trade them?
The crypto market have matured in recent years. Consequently, a growing forum of investors have sought out reputable exchanges in order to cure their options trading itch. Listed below are some platforms available in the market today.
Launched by Asian crypto giant Matrixport, a company that is headed by Chinese billionaire, cryptocurrency entrepreneur Jihan Wu. Bit.com is a high-performance derivative exchange offering its users a wide range of institutional and retail-friendly features.
For example, the platform comes replete with a portfolio margin module. This module allows hedgers to accrue quality incentives all while minimizing their portfolio risks. Not only that, it also enables block trading on all products. This is facilitated via the use of quality derivatives brokers such as Paradigm and ACCX.
When compared to other exchanges, bit.com offers users an advanced trading tool called ‘Unified Margin’. This module can be described as an upgraded trading and risk management system. It adopts one single account solution to trade options, spots, margin, perpetual and futures.
To elaborate on the setup, all collateral cryptocurrencies in the aforementioned unified account are shared as USDT denominated margin. This is to not only enhance the system’s native capital utilization capabilities, but also lower its overall liquidation related risks.
Another extremely popular cryptocurrency options trading platform is FTX. Sam Bankman-Fried, an American entrepreneur who was recently hailed as the youngest billionaire in the world created FTX .
FTX specializes in the trade of many different derivatives and leveraged products. This includes (but is not limited to) options contracts, various volatility offerings, spot markets, etc. Also, every options call facilitated by the user on the platform is backed by many security guarantees. Furthermore, FTX’s user interface features a custom-built hot and cold wallet solution. FTX requires the use of a two-factor authentication (2FA) approval each time a transaction is facilitated.
The first exchange in the United States to provide bitcoin contracts was FTX. These contracts were known as mini-contracts for bitcoin. These fractional contracts allowed for scalability as the markets changed and allowed investors to make precise trades.
Traders have the power to design/devise their own options contracts and request a direct quote from the exchange. Once an offer is received by the investor, the individual can choose to either accept, reject, or propose a counteroffer.
FTX filed for bankruptcy in November 2022, and Sam Bankman-Fried, the company’s founder, resigned as CEO.
Deribit is widely considered to be one of the most popular crypto derivatives platforms in the world. It was one of the first exchanges in Europe to offer Bitcoin futures and options when it launched in 2016. Deribit’s position as a market leader has only continued to grow in recent years. This is a result of the platform offering its clients a range of financial tools including futures, perpetual swaps, and options related to Bitcoin and Ethereum.
The exchange comes replete with an extremely professional dashboard that allows users with varying technical skills to seamlessly trade options, futures contracts. Furthermore, Deribit’s deep liquidity pool combined with its low latency rates (i.e. the time taken to complete a specified transaction) have helped spur its popularity amongst derivatives traders.
Deribit’s BTC USD denominated futures contracts are cash settled rather than physical delivery of Bitcoin. The exchange provides quarterly Bitcoin and Ethereum futures contracts. There are also leveraged options contracts and cash-settled BTC and ETH swaps for the two assets. Fees are consistent with industry standards, and withdrawals are processed instantly via a hot wallet.
Lastly, it should be noted that all options on Deribit can only be exercised upon their expiry with all contracts being “cash settled”. Lastly, every option on the platform is automatically settled upon its expiry, i.e. any intrinsic value due is paid out to the owner as “profit”.
OKX, formerly known as OKEx, is a popular cryptocurrency exchange offering users with a range of features including options/spot/derivatives trading (amongst many others). The platform made its debut in 2017 and has since continued to accrue a growing amount of mainstream traction thanks to its industry-leading liquidity.
OKX provides its clients with certain niche products designed to assist beginners in their journey towards trading options — all while providing them with various price discovery benefits (i.e. allowing investors to source the best deals for themselves).
OKEx provides all three contract types: futures, options, and swaps. It offers weekly, bi-weekly, quarterly, and bi-quarterly crypto margined contracts and Tether margined futures. Futures contracts are available for Bitcoin, Ethereum, XRP, Litecoin, EOS, Ethereum Classic, Bitcoin Cash, BSV, and Tron. Margined contracts in USDT are also available for these nine assets.
Lastly, the platform also provides users with a host of technical data from global options markets, allowing them to identify and understand financial ongoing trends in order to increase their profits.
A new standard for derivatives trading?
Crypto derivatives trading has several advantages over traditional derivatives trading. The use of smart contracts allows for more automation and reduces the need for intermediaries, which can improve the overall trading process. The increasing number of investors entering the cryptocurrency market has led to the development of various trading tools that make it easy for users to engage in crypto trading, similar to the traditional finance sector.
These tools have gained widespread popularity and make it easy for users to participate in various crypto trading activities. As the use of cryptocurrency and blockchain technology continues to grow, it is likely that crypto derivatives trading will become an increasingly popular option for traders.
In the future, it could even become the standard for derivatives trading, as it offers many benefits that traditional methods cannot match. Overall, crypto derivatives trading has the potential to revolutionize the world of trading and bring a new level of accessibility and fairness to the market.
Frequently Asked Questions
What are derivatives?
A derivative is a financial instrument that derives its value from the performance of an underlying asset or group of assets. The underlying asset can be a commodity, currency, bond, stock, or market index, among other things. Derivatives are used to hedge against risk or to speculate on the future movement of the underlying asset.
Are derivatives safe?
Derivatives can be a useful tool for managing risk and increasing the efficiency of financial markets, but they also carry the potential for significant losses if not used carefully. Derivatives are complex financial instruments and can be difficult for even experienced investors to fully understand. This can make them risky if an investor does not have a good understanding of how they work and the potential risks involved. In addition, the use of leverage, which is common in derivatives trading, can magnify potential losses.
What are synths?
Synths, short for synthetic assets, are digital assets that are designed to mimic the price and performance of real-world assets. They are created using smart contracts on a blockchain platform, and their value is derived from the value of the underlying asset or assets that they are designed to track. Synths can be used for a variety of purposes, including as a way to speculate on the price movements of the underlying asset, as a hedge against risk, or as a way to gain exposure to an asset that would otherwise be difficult or impossible to invest in directly.
Are synths and derivatives the similar?
Synths are similar to traditional financial derivatives in that they allow investors to gain exposure to the performance of an underlying asset without actually owning the asset itself. However, they differ in that they are typically more easily traded and more accessible to a wider range of investors. They also offer the potential for lower costs and faster transaction times compared to traditional derivatives.
The information provided in independent research represents the author’s view and does not constitute investment, trading, or financial advice. BeInCrypto doesn’t recommend buying, selling, trading, holding, or investing in any cryptocurrencies