In 2009, Bitcoin was launched as the world’s first blockchain-based digital asset. In the subsequent years, the capabilities of blockchain technology and decentralized cryptocurrencies were quickly realized, and the two technologies are now poised to disrupt practically every industry there is.
But if there’s one sector where this innovation is particularly focused, then it’s the cryptocurrency trading landscape, which is remarkably well-developed given the infancy of the cryptocurrency space. Much of this innovation is being made in the way of cryptocurrency options, which may represent the future of trading.
What Are Cryptocurrency Options?
Cryptocurrency spot markets most common type of market most traders are accustomed to working with. These are markets where users simply trade one cryptocurrency for another, usually through a centralized order book.
Though this is an effective way to exchange value, it lacks the granular capabilities that traders need to employ more advanced, nuanced trading strategies. To cater to the growing needs of institutional investors and the increasing sophistication of individual traders, a number of more advanced trading products have been released in recent years.
These are known as derivatives — essentially digital contracts between one or more parties to exchange an underlying asset at a given price on a given date. In the cryptocurrency industry, derivatives are generally known as either futures or options contracts — the latter of which is becoming particularly prominent in 2021.
Options are financial contracts that give the holder the option (but not the obligation) to buy or sell an underlying asset, such as Bitcoin (BTC) or Ethereum (ETH) for a specific price on a given date. This is in contrast to futures contracts, which mandate that the transaction is carried out.
Where Do You Trade Them?
Though cryptocurrency spot trading platforms are still the most common, options exchanges and decentralized options trading protocols have exploded in number and popularity in the last year — largely due to the growing accessibility of DeFi.
Today, there are more than a dozen popular cryptocurrency options exchanges, including the likes of Deribit, FTX, Quedex, and LedgerX. These allow users to trade options contracts for a wide array of cryptocurrencies with various strike prices and expiry dates.
However, many of these platforms have restrictions on who can use the platform and they’re all centralized — meaning traders need to hand over custody of their funds to use them. This has led many traders to seek DeFi options trading protocols instead, since these are open and uncensorable by definition.
Among these, Premia has emerged as arguably the front-runner, since it allows users to trade a massive array of options through a decentralized protocol using just their web3 wallet. It also among the only platforms to let users create and trade their own custom call and put options contracts — letting traders set their own underlying, strike price, and expiry, among other things.
Image courtesy: Premia
Why Traders Are Increasingly Turning to Derivatives
The cryptocurrency derivatives market is now several times larger than the spot market, both in terms of completed transaction volume and open interest. This is in stark contrast to 2017 and earlier, when the derivatives market was still in its earliest stages of development.
The large majority of professional traders now frequently trade derivatives products, due to the increased flexibility they offer over regular spot trading.
For one, cryptocurrency futures and options can often be traded on leverage, allowing traders to multiply their exposure to the market and make the most out of limited capital. Some platforms offer up to 100x leverage on these products, allowing traders to multiply their potential returns 100 fold.
They also offer a simple way to profit on a declining market, such as by buying put options or going short with futures. By combining this with leverage, traders with a keen eye for dips and crashes can net hefty profits that would be extremely difficult to capture on the spot market.
With modern DeFi platforms now offering custom options, and liquidity for options now at all-time highest levels, the cryptocurrency derivatives industry looks set to continue gaining market share in the coming months and years.