Options Trading Is a Huge Step for the Crypto Derivatives Market

For those of us involved in the cryptocurrency space, we've gotten used to the fast-paced nature of this rapidly growing industry. New technology quickly becomes old, bright shiny projects lose their luster, and what started out as a few privacy advocates sending “magic internet money” to one another has mushroomed into a whole new asset class with a robust infrastructure established around it. Every new product, application or financial instrument that we add has value and attracts more participants. Options trading is a huge step for the crypto derivatives market — and it’s already proving its worth.

How the crypto space has grown

Cast your mind back to 2017 before the Chicago Mercantile Exchange or Chicago Board Options Exchange entered the cryptocurrency space with their Bitcoin (BTC) futures offering. Back then, the most common expression you’d hear (time and time again) about crypto was that it was just like the “Wild, Wild West.” Lawless, volatile, full of scam projects and initial coin offerings over-promising and underdelivering, or even outright stealing investors’ money.

Even though Bitcoin had been around since 2009, it was very new to most people then. Some of the gains being made were phenomenal — and the losses utterly devastating. Many banks were calling Bitcoin a scam including (perhaps most infamously) JPMorgan’s CEO Jamie Dimon, who said it was a fraud back in September 2017.

Fast-forward to today and every bank wants to integrate blockchain technology (or already has) to enhance efficiency and reduce costs. JPMorgan and its boss have shown a complete 180 degree turn, going as far as launching their own JPM Coin to facilitate instantaneous payments. 

The United States’ largest financial institutions have even opened bank accounts for major U.S.-based cryptocurrency exchanges, while governments around the world are either researching or actively piloting their own version of a cryptocurrency backed by their central banks.

The point is that cryptocurrency can no longer be ignored. With improved regulation and decisive action, we have managed to weed out many of the bad actors and scam projects to grow the space almost beyond recognition. 

The rise of crypto derivatives

The derivatives space has now attracted investment from institutional players and, last year, a landmark move from a New York Stock Exchange-backed company to enter the market with its physically-settled Bitcoin futures contracts. Indeed, the growth of crypto regardless of bull or bear markets has been exponential and now, derivatives are leading the charge. Yet, we still have a long way to go. 

The entire cryptocurrency market cap is still under $300 billion today. Compared to gold at $9 trillion or the global stock market at almost $100 trillion, it’s clear that crypto is still in its infancy. 

When looking at traditional markets, derivatives typically account for more than four times the trade volumes of the underlying asset. Yet, in crypto, spot trading is still much larger. That won’t be the case for much longer. At OKEx, it is our belief that derivatives will outgrow the spot quickly to become four or five times larger over the coming years. And this growth will be further fueled by more sophisticated offerings such as options trading.

The importance of options trading

Options are so important, as they give traders more versatility and a great way to hedge their risk. Like futures, with options contracts, traders can buy or sell an agreed amount of the underlying asset on a fixed date in the future at an agreed-upon price. However, unlike futures, options give the buyer or seller the right, rather than the obligation, to buy or sell on the date.

This depends on whether the trader buys a “call” option or a “put” option. Briefly, the difference between the two is that with the former, the trader can exercise the right to buy Bitcoin (or the asset in question) and with the latter, she or he can exercise the right to sell. Since these are rights and not obligations, many traders feel more comfortable trading options especially in such a highly volatile market as crypto.

Options are a relatively new feature. Deribit was the only exchange offering crypto-backed options until mid-2019, followed by Baakt in December 2019 and OKEx and CME launching BTC options soon after. Despite their brief time in the space, crypto-backed options are already being widely used by BTC traders to generate an income and shield their holdings from rampant volatility. They are also particularly useful for miners right now due to the Bitcoin halving. They can use options to lock in future revenue and secure an acceptable price for selling mined Bitcoin, much like farmers in ancient Greece did to secure their income in the event of a bad harvest. We saw this happening leading up to the halving in April as the BTC price turned bullish again and BTC options registered a one-month high, with OKEx topping the leaderboard. 

As with every innovation and product offering, the market becomes more interesting, more mature and more reflective of traditional markets. And allowing traders to keep their pricing strategies more flexible is more appealing to institutional traders. 

Beyond Bitcoin options trading

Of course, Bitcoin’s dominance in the market is undeniable. Of the thousands of cryptocurrencies that have grown up around it, Bitcoin dominance still remains at around 65%. Bitcoin is also more widely accepted and better understood. It will be the gateway for most people and institutions into crypto trading and derivatives. But that doesn’t mean there isn’t a place for other crypto options as well.

At OKEx, one of the main reasons that we have continued to thrive and become a leading exchange is through our sheer diversity of products. After seeing the high demand for BTC/USD options, OKEx is adding ETH/USD options for traders this week as well, and we believe it will gain traction fast.

All these alternatives help to diversify the market, make it more colorful, rich and interesting. The crypto derivatives space is becoming more competitive with new entrants coming in all the time. This can only be a good thing for the space. Over the coming years, we will witness the volumes go from the billions of dollars to the trillions, and crypto will become a major contender at last.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.