Crypto’s unexpected recovery since its March crash has been bolstered by good news on US inflation in the past week: import prices fell more than expected last month by 1.4%.
Yet, for investors, an uncertain future makes a sudden rush back into equities potentially unwise, while bonds are equally unappetising.
This opens the door for investors to explore a new frontier – crypto options trading.
According to leading crypto fund QCP Capital, options trading is likely to be highly attractive to institutional investors in cryptocurrencies in the coming years, especially when compared with decentralised or NFT finance.
Options trading allows investors to make a significant profit on a possible rise in future stablecoin values, for example, whilst also granting them an insurance policy in more volatile crypto markets.
While trading in derivative products such as options, which gain value from an underlying commodity or market, has grown significantly in recent years, these financial instruments date back hundreds of years, long before they were first formally traded in 1973.
In fact, the first evidence of these instruments can be found in ancient Greece. Around the sixth century BC, the Greek philosopher Thales profited greatly from an option-type agreement, according to Aristotle, by predicting that the next olive harvest would be exceptionally good a year in advance.
As a poor philosopher, he had limited funds, but he used what little he had to put down a deposit on the local olive presses. Because no one knew whether the harvest would be good or bad, Thales got the rights to the presses at a low cost. When the harvest was plentiful, and demand for the presses was great, Thales charged a premium price for their use and profited handsomely.
The fact that Thales’ arrangement did not live or die on his correct prognosis for a successful harvest is a key feature of options trading. The deposit allowed him the right to hire the presses but not the duty to do so. His losses if the harvest failed were confined to the original deposit he paid.
Thales had bought an option.
Fast forward thousands of years and cryptocurrency has quickly developed from its previous status as a niche asset only understood by anti-establishment programmers into a market that is expected to more than triple by 2030.
Options appear to be the right product for current uncertain times: allowing for both significant profits and a reliable method for hedging risk.
While options are sometimes viewed as the lifeblood of the commodity sector, they are now gaining traction in the global crypto investment community.
Deribit was the first exchange to provide European vanilla options backed by Bitcoin and Ether, but the crypto options market is rapidly expanding.
Until recently, investors had to convert fiat currency into cryptocurrencies such as Bitcoin before trading options on the same or other digital assets. Fortunately, prominent exchanges have changed the game by rolling out USD-margin trading.
On full-suite crypto exchange Bit.com, for example, a unique USD-margin options trading system allows users to buy and sell cryptocurrencies denominated and settled with US dollars, or USD-pegged stablecoins, rather than with other digital tokens.
Trading with dollars as collateral gives a solid foundation to investors, who can now fully focus on their trades rather than any possible volatility in their collateral. In fact, USD-margin trading offers a similar risk management potential as using US government bonds as collateral, as practised by Wall Street’s primary lenders.
In the words of Lan, Co-founder and COO of Bit.com: “Even in bear markets, options trading continues to build momentum. The availability of decentralised, tokenized options trading with a USD-margin lays the way for a more flexible and democratic future in options trading.”
Bit.com aims to direct this tool toward becoming a standard for digital asset trading by both individuals and retail traders. Whereas other exchanges such as Hodlnaut are experiencing massive layoffs, and Genesis similarly cutting 20% of its staff, Bit.com recently announced it is looking to double its workforce, demonstrating its faith in its offerings and the potential of the crypto market.
Crypto options are attracting increasing numbers of investors and traders from traditional financial institutions because they allow investors to trade large blocks of cryptocurrencies without making large financial commitments.
Hedge fund manager Shiliang Tang, who runs LedgerPrime, a $130 million fund packed with Wall Street converts from Virtu Financial Inc. and Cantor Fitzgerald, netted a 78% return thanks to his options-powered strategies.
This is taking place alongside another significant trend in the world of USD-pegged stablecoins. The native stablecoin of Terra, UST, had lost its peg and was trading for less than $1 back in May. Other stablecoins, like Tether’s USDT, followed suit a few days later.
It did appear that USDC (USD Coin) was rising at that point, and there were discussions about a potential flip as well.
This week, the market cap of the #1 stablecoin, USDT, was $67.5 billion, while the market cap of the #2 stablecoin, USDC, was $53.5 billion. The market caps of the two assets, however, have recently been shifting in different directions.
Some have noted that over the past month, approximately $1 billion has moved from USDC to USDT. It would not come as a shock if institutions and bigger players felt safer keeping their money outside of the U.S. after the recent regulatory push in the country against cryptocurrency companies and tokens.
With the economic impact of Covid-19 and the war in Ukraine predicted to persist until 2025, cryptocurrency markets will undoubtedly stay volatile. Defi apps and exchanges are working hard to bring more cryptocurrencies to the options market and to simplify complex trading techniques for clients.
Whether the cryptocurrency tech sector decides to concentrate on decentralized transmission, storage, bridges, or DeFi- no-nonsense trading tools such as options trading will unquestionably play a significant role in determining the direction of the cryptocurrency markets.
Nobody knows what cryptocurrency will look like in the future, but one thing is certain: this innovative market will keep developing and adapting fluidly to shifting laws, cutting-edge technologies, and the needs of institutional and retail traders.