• Crypto options trading benefits from overall downturn in digital currencies
• Institutional investors and miners use options to protect themselves against increased volatility
• Options as a hedging instrument in the crypto sector are still relatively uncommon
Crypto enthusiasts have had to cope with some bad news lately, especially the months of April, May and June were extremely painful for the Bitcoin, Ethereum and Co. industry. Once highly successful and influential crypto companies such as Terra Labs, Celsius or Three Arrow Capital (3AC) fell victim to the crypto crash. However, there was one little-noticed area of the market that experienced a veritable boom during the general downturn in digital currencies, namely crypto options trading. How is this to be explained? And what scope could crypto derivatives trading have in the future?
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Crypto options are becoming increasingly popular
Amid the crypto dreariness, Bitcoin and Ethereum options trading benefited from high demand from institutional investors. Their intention is to hedge against the violent volatility of digital coins. For example, the well-known crypto bull Michael Novogratz emphasized in the latest report from his financial services company Galaxy Digital that profitable options trading was able to compensate for the losses caused by the fall in cyber currencies.
Who is benefiting from this boom? One of the main beneficiaries of the options boom is the crypto exchange Deribit, which is one of the world’s largest exchanges for trading options. Deribit told CoinDesk that demand for crypto options has surged in recent weeks. Options on ether are currently particularly popular because of the merger announced for September.
Derivatives-focused crypto exchanges are catching up
Deribit is just one example of a general trend: the emerging derivatives exchanges are generally booming and catching up with the previous market leaders. Unlike the big player Coinbase, which is based in the USA, the location of the derivatives exchanges is mostly “offshore”, i.e. outside the USA. For example, Deribit is based in the tax-friendly country of Panama.
When presenting the last quarterly figures, Coinbase explicitly blamed a significant migration of many traders to crypto exchanges with a focus on derivatives for the 30 percent drop in sales. “More of the trading volume in Q2 was on offshore exchanges,” Coinbase wrote in the letter to shareholders, adding, “The sequential decline in institutional trading volume in Q2 was primarily driven by lower market maker volume on our trading platform. Those market participants are gravitating toward products like derivatives and financing products, which are areas that we continue to invest in. But we don’t currently have product parity with offshore exchanges.” For this reason, Coinbase wants to greatly expand the product range of crypto derivatives. It will be possible to read in the following quarterly reports whether the migrated users will return.
Miners are increasingly using crypto options to protect themselves
Derivatives trading with the digital tokens also benefits from the high demand from another group, namely the miners of cyber currencies. The miners are suffering particularly badly from the Bitcoin downturn and are increasingly buying crypto options as a hedging tool – similar to a farmer who buys options on the respective agricultural commodity to hedge his crops. The advantage of options is that you can also use them to bet on falling prices of the respective asset using so-called put options. In this way you can profit from a price drop – in the last few months this has been an extremely lucrative business. Derivatives trading was thus an attractive strategy for miners, for example the mining company Argo Group hired a derivatives trader for this purpose.
Another tactic was bulk selling of bitcoin holdings to maintain positive cash flow. Some mining companies in Texas even switched off their production in order to sell the electricity saved as a result at a profit. The fact is that miners are doubly suffering from high energy prices and low crypto prices, and crypto put options can limit at least part of the losses.
That’s why crypto options trading could continue to grow
So, crypto options trading offers some advantages for the respective traders. Overall, however, the market share of the options is still very small compared to the overall trade in digital currencies. Bitcoin options account for just 2 percent of the total volume of open derivative contracts (around $462 billion, according to Enhanced Digital Group data) around the proto-cryptocurrency. With ether, this value is twice as high at four percent, but significantly lower than that of the large US index S&P 500, in which options trading accounts for 20 percent of the total trading volume, as reported by the “Enhanced Digital Group”. It can be assumed that options trading with coins will continue to increase, since hedging is still relatively uncommon in this sector. In addition, so far there have almost exclusively been options for the two largest cryptocurrencies, Bitcoin and Ethereum, which is why the derivatives exchanges want to gradually expand their range to other digital tokens.
Industry insiders are optimistic
Marcin Maksymiuk, Quant Developer at EDG, expects crypto derivatives trading to continue to grow strongly: “If you think about all the other S&P 500-like products like ETFs, SP Minis etc. you can see that bitcoin options have a multiple have growth ahead of them,” he predicts to CoinDesk. The head of the crypto exchange Delta Exchange, Pankaj Balani, also shares these positive expectations. Currently, Delta generates over $200 million in average options trading volume per day. Balani expects this metric to increase as “options provide a way for people to engage with the market, even in a sideways environment.” Therefore, he expects that options will make up 60 percent of the entire crypto trading market in the future.
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