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- Although the BTC and ETH options markets are still in their infancy, there is already retail and institutional demand for cryptocurrencies.
- The transition away from traditional financial institutions has been hastened by the new financial landscape and persistent uncertainty
- The world of cryptocurrencies has grabbed centre stage as the economy seeks to kick into high gear from a standstill
Although the BTC and ETH options markets are still in their infancy, there is already retail and institutional demand for cryptocurrencies. Despite ongoing vaccine efforts and epidemic relief, the global economy appears to be very different than it was a year ago. The transition away from traditional financial institutions has been hastened by the new financial landscape and persistent uncertainty.
The world of cryptocurrencies has grabbed centre stage as the economy seeks to kick into high gear from a standstill. Major asset managers, investment banks, and hedge funds have all recognised it as a distinct asset class. As widespread acceptance continues to take the financial world by storm, it is allowing investors to explore a new frontier: cryptocurrency options.
Exactly what are Options?
Options are financial contracts that allow investors to buy or sell an underlying asset at a defined price at a set date in the future. It enables investors in the price movement of an asset to put directed bets. Investors who anticipate the asset’s value increasing might purchase call options, which will profit if the asset’s market price surpasses the strike price. If they feel the asset will depreciate in value, they can purchase a put option, which will benefit if the asset’s market price falls below the strike price.
Investors can choose to exercise their options if certain conditions are met, compelling the issuer to buy or sell the underlying asset at the strike price or from the investor. They can also benefit by trading their options with others.
Institutional Interest in Options and Cryptocurrencies
Institutional appetite for crypto options has grown in tandem with institutional interest in the cryptocurrency markets. Strategic investors have taken refuge in the notion that options allow them to profit from the volatility of crypto markets while staying away from higher-risk bets. Because of the volatile nature of crypto markets, investors must be able to diversify their methods and hedge their positions while still having upside exposure.
Investors can now play the field, invest tactically, and research the market using options markets. This has maintained strong activity even during what some are calling a bear market.
Options have various characteristics that make them more appealing to investors, particularly in a volatile market. Investors can acquire exposure to larger positions for a fraction of the cost by using options. Consider purchasing 100 shares of a stock for $50. An investor would need $5,000 in funds in order to be in this position. However, by utilising choices, the cost can be greatly lowered. A similar investor can have the same exposure to a stock or cryptocurrency by purchasing an option for a fraction of the price, say $150.
Options are a strong tool that allows investors to profit from market volatility by allowing them to engage in the markets while freeing up funds, allowing them to diversify their approach and take on a bigger number of positions.
Investors can also obtain exposure to market volatility by using options. Options become more expensive in a volatile market since their price is directly associated with market volatility. As a result, an investor who has a long position in an options contract will benefit from market volatility as well.
Institutions aren’t the only ones to blame
Even in the midst of global economic instability, an increasing number of retail investors recognise the value of delivering options to consumers. According to Trade Alert, the options market saw a record year in terms of trading volume in 2020, with 7.47 billion contracts exchanged. This upward trend continued in earnest into early 2021.
Surprisingly, retail investors were the ones that increased their volume the most. Options brokers such as Schwab have experienced a 116 percent growth in the number of options traded, according to a Barron’s article. Retail investors account for 60% of all options traded, as shown by position sizes of less than 10 contracts. In fact, in the same time span, the number of single contract deals has doubled.
Given the massive institutional demand, large names such as Goldman Sachs have indicated plans to expand their crypto presence by offering options trading in Ether (ETH) as we approach into 2021. These products will be available to its retail clients as well, reducing some of the system’s leverage and providing a simple onramp for investors.
The current and the upcoming innovations
Today, centralised exchanges are better able to accommodate retail options demand. They are not affected by the network congestion that exists on Ethereum, allowing for faster trade execution and lower costs.
That doesn’t rule out the breakthroughs that come with decentralised finance moving at a faster pace. Many established financial industries have been disrupted by DeFi, and it is now looking to expand the number of possibilities accessible. As the ecosystem evolves, decentralised exchanges will play an increasingly important role in linking individual investors to options.
With the global pandemic’s economic impact predicted to persist until 2025, cryptocurrency markets will undoubtedly stay volatile. DeFi apps and centralised exchanges are working hard to add more and more cryptocurrencies to the options market while also innovating to make sophisticated trading methods easier to understand for investors.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
