Bitcoin Options Trading Poses New Risks to the Market
The Bitcoin (BTC) market will have another source of risk – trading in options. The intention of derivative instruments is to hedge the risk for owners, or potential buyers. But trading option positions holds an additional risk of its own.
Bitcoin Options Exposure Expected to Grow Next Year
Options exposure is growing, as the markets already offer several tools on various types of exchanges. The mainstream Bakkt exchange has been offering Bitcoin (BTC) options since December 9, and the CME will start the product on January 13.
However, exposure is also growing on the dy/dx DeFi exchange, and other crypto-to-crypto markets. The growth of options trading may turn into a source of losses, especially given the volatile nature of BTC. OKEx also launched its options trading for BTC this December 27, linking it to one of the most active futures markets. The Deribit exchange is also a source of European-style options, and is one of the leading markets.
$9.5MM in options exposure. 2020 is going to be a hell of a year.
— light (@LightCrypto) December 30, 2019
Options should, in general, offer strategies to offset various price move risks. There are multiple complex options strategies used for stock price moves. The risk with bitcoin comes from the much smaller market.
Over the past years, futures trading saw traders liquidated after sharp BTC moves. Options may open similar risks, as some strategies may prove unsuitable for bitcoin price moves.
As with futures, there are the possibilities to trade options positions, without buying the actual underlying asset. The inherent risk in positions trading may create more complexity, especially with fast and unexpected BTC price moves.
Riskier Options Offered by Small Startups
The other risk will stem from smaller startups offering their own options types, where trading may be even riskier. The trending of options trading on larger platforms is also rekindling the interest in bitcoin binary options, perhaps one of the riskiest bets of all.
In this case, the options are a bet on which direction the bitcoin price would take. Making the wrong bet could lead to immediate losses, and in the case of BTC, price moves often happen within hours. Options also mean no chance of holding actual bitcoin, an asset that at least cannot be confiscated or liquidated.
There is no way to predict how fair or active the options market would be. Even large exchanges are currently building up their usage.
⬇️Global Listed BTC Option Open Interest more than halved after the Dec19 expiry.
📈How long will it take before reaching the same levels?
❓More importantly, what will be the split between venues at the same time next year, with Bakkt, CME and OKEx ready to challenge Deribit? pic.twitter.com/bnduBiPjYa
— skew (@skewdotcom) December 29, 2019
Other predictions are more pessimistic, seeing options trading as a tool to further tame the bitcoin price.
Bitcoin will never go to 1 Million (or even 100K for that matter),….why? Because of BAKKT Cash Settle Futures option on Bitcoin. If you don't believe that, just look at what has happened to the Precious Metals Markets with CASH Settled Options. No True Price Discovery.
— Cryptonaut (@Crypton09915373) December 30, 2019
While BTC could grow with no limits on the spot market, driven by bots and whales, options markets gather a new type of trader, interested in positions and not the long-term future of BTC.
What do you think about BTC options trading? Share your thoughts in the comments section below!
Images via Shutterstock, Twitter @LightCrypto @skewdotcom @Crypton09915373