Prior to 2017, the crypto market was generally treated with derision by legacy finance, with descriptions of it being the wild, wild west commonplace. The introduction of bitcoin futures offerings from CME began to change that, opening the door for other crypto derivative products.
Following the 2019 launch of platforms like Deribit and Baakt, options took the crypto derivatives market by storm in 2020, with volumes crossing $1 billion for the first time in December, marking the end of a parabolic year for the growing market niche.
What Are Options?
As with futures contracts, options traders can buy or sell an agreed amount of bitcoin (or other underlying asset) on or before a future date (expiry) at an agreed price (strike). For a fixed premium, this provides a lot more versatility in hedging risk. The main difference is that options give the buyer or seller the right but not the obligation to buy or sell on or before that date.
“Call” options allow traders to exercise the right to buy at the strike price, and “put” options the right to sell, ideal for helping traders to manage and take advantage of volatility in the space, with the maximum loss limited to the value of the premium paid and the upside unlimited. This, of course, is assuming the traders are buying rather than writing options, which would imply the opposite.
There is no sign of this growth slowing down either, with the $2 billion options volume threshold quickly surpassing the December all-time-high in January, and open interest nearly hitting $9 billion as 2021 surpassed 25% of total 2020 volumes in just the first two weeks of the year. Bitcoin has dominated the options market as it has futures and spot, but again is providing the gateway into trading other crypto options as well, setting up an exciting 2021 for the sector.
So what are the options platforms to watch this year?
FinNexus
FinNexus is pioneering a cross-chain DeFi protocol for writing and buying options while being exposed to multiple assets from within collateral liquidity pools. Its Multi-Asset Single Pool (MASP) system enables anyone anywhere to leverage or hedge their positions in a variety of crypto assets. Currently live on Ethereum and Wanchain, FinNexus has launched several updates in recent weeks and plans even more in the near future.
Underlying asset support for BTC, ETH, LINK, SNX, and MKR, with potential for unlimited tokens.
- Multi-chain.
- Non-custodial
- No KYC.
- Secure and decentralized platform.
- Transparent team.
- Liquidity Pools for automatic risk diversification.
- Customized options for buyers.
- American style options (exercised on or before the expiry date).
- Cash settlement.
- FNX native utility token for payment/settlement, collateral, liquidity mining, governance, and voting.
- Yield-earning opportunities by adding FNX, WAN, or USDC/USDT to the liquidity pool.
- Fully-audited.
Hedget
Hedget is a decentralized protocol for options trading. Users can buy and sell options products on the Hedget platform by providing collateral in the form of stablecoins or ETH. The decentralized options products allow users to hedge the risk for their crypto holdings as well as their debt positions on other lending protocols such as Compound and Aave. The protocol also adds support on layer 2 to enable faster, cheaper, and more complex transactions.
- Underlying asset support for ETH, expanding to other ERC20 tokens.
- Ethereum chain.
- Non-custodial.
- No KYC.
- Secure and decentralized platform.
- Transparent team.
- European style options (exercised on expiry date).
- Cash/physical settlement.
- HGET native token serving governance, staking, and other utility purposes.
- Fully-collateralized requirement using USDC, DAI, BUSD, or ETH.
- Earn HGET tokens through liquidity mining.
- No known audit.
Deribit
Deribit is a Panama-based company and derivatives exchange launched in 2016 by industry experts John Jansen and Sebastian Smyczýnski. It offers a range of crypto products including perpetual swaps, futures, and options. It has consistently delivered the highest levels of volume and open interest for bitcoin options among the centralized crypto trading platforms, out-competing the likes of the CME and LedgerX.
- Underlying asset support for BTC and ETH.
- Off-chain.
- Custodial, though connected to a network of off-exchange custodians with 99% of funds held in cold storage.
- Light KYC up to certain limits, then full KYC with ID verification.
- Centralized ecosystem registered in Panama and prohibited to US residents.
- Transparent team.
- European style options (exercised on expiry date).
- Cash settlement.
- No tokenization of governance rights, platform value, or utility.
- Cross margin collateral required using BTC or ETH.
- No additional earning or reward incentives other than a referral program.
- Unregulated though compliant platform.
Hegic
Hegic protocol allows users to create, maintain and settle trustless options-like on-chain contracts. These contracts give the holder (buyer) a right to buy or to sell an asset at a certain price, and impose an obligation on the writer (seller) to buy or to sell an asset during a certain period. This can be useful for market participants who want to protect their assets from price downside and for liquidity providers who might find the returns on writing hedge contracts attractive enough to allocate some of their capital to its liquidity pool contract.
- Underlying asset support for WBTC and ETH.
- Ethereum chain.
- Non-custodial.
- No KYC.
- Secure and decentralized platform.
- Pseudonymous/anonymous team.
- American style options (exercised on or before the expiry date).
- Cash settlement.
- HEGIC native token serving governance, staking, liquidity mining, and other utility reward purposes.
- Fully-collateralized requirement using WBTC or ETH.
- Additional yield earning opportunities by adding WBTC or ETH to the liquidity pool.
- Fully-audited.
LedgerX
LedgerX is a digital asset futures and options exchange and clearinghouse, headquartered in New York and regulated by the US Commodity Futures Trading Commission (CFTC). LedgerX is available to both retail and institutional investors and offers physical settlement of all contracts, block trading and algorithmic trading opportunities for institutional investors, and direct access for all traders. Since its launch, LedgerX has cleared over 10 million options and swaps contracts.
- Underlying asset support for BTC in mini contracts of 0.01 BTC.
- Off-chain.
- Custodial, though multi-sig, insured and with the majority of funds held in cold storage.
- Extensive KYC requirements.
- Centralized US-based ecosystem.
- Transparent team.
- European style options (exercised on expiry date).
- Physical settlement.
- No tokenization of governance rights, platform value, or utility.
- Individual order collateral is required using BTC or USD.
- No additional earning or reward incentives.
- Fully licensed, audited, and compliant US regulated platform.
Crypto Options Set for an Exciting 2021
Regulated platforms like LedgerX provide institutional-grade security for traders, but KYC and custodial risks don’t align with the aims of decentralized finance. Therefore, risk-mitigating DeFi protocols like decentralized options are increasingly necessary as the decentralized finance sector continues to grow and mature.
Secure, transparent, and fully audited multi-chain platforms like FinNexus provide an ideal alternative, with built-in token incentives delivering a decentralized, non-custodial, and censorship-resistant solution with American-style options flexibility to manage and take advantage of crypto volatility, without incurring centralization risks.
The 2021 macro backdrop has already highlighted how vital decentralized systems are, and with bitcoin options strike prices now being offered as high as $400,000, it’s set up to be an exciting year for the crypto derivatives space.