What are bitcoin options? Differences between options and BTC futures

The word “option” has a magical ring to institutional players because it allows you to completelyeliminate the risk of losing large funds when trading cryptocurrencies.

In this regard, first Bakkt, then CME Group, and then the crypto exchange Bitfinex announced plans to launch new derivatives for bitcoins. On a limited scale, such transactions are carried out on Binance JEX.

All this, given the existing infrastructure,will make cryptocurrencies irresistibly attractive assets for institutional players in the financial market. But whether this will lead to increased volatility of cryptocurrency prices and how the cryptosphere will develop in general in connection with the emergence of such derivative financial instruments - we understand the material.

At the end of October, the financial world learned thatthe cryptocurrency sphere will have not only bitcoin futures, which have already become commonplace, but also another derivative financial instrument (derivative) - options on the oldest cryptocurrency.

Representatives of the platform were the first to announce thisBakkt. On October 24, a message was published on the company’s blog, from which the launch date of new derivatives became known - December 9 of this year. What kind of innovation is this? Trading options on other assets is well known. However, for a considerable number of representatives of the cryptocurrency world, this turns out to be a new phenomenon.

Futures and Options: General

Options (not to be confused with binary options) andfutures are contracts. In the case of futures, we are talking about buying bitcoin by one side of the contract from the other, if it is a delivery type of transaction. For the first time, such transactions appeared on September 23, 2019 (if you consider the date in the UTC time zone, 00:00) on Bakkt.

The purchase is made on a predetermined day "in the future" (hence the origin of the word futures). No party can withdraw from the contract, that is, it must be executed as it is.

Futures, unlike a forward transaction, onthe purchase of bitcoin is an exchange contract, that is, standardized for a number of parameters, including the due date and the amount of the underlying asset for which such a fixed-term contract is issued.

It is worth paying attention that for the first timeBitcoin futures appeared in the everyday life of the cryptocurrency world in December 2017: on December 10, the classic Cboe exchange was released with such tools (until the refusal to release new series since March of this year).

December 18, the same tools appeared onCME Group (Chicago, Illinois), followed by the BitMex trading platform and a number of other sites. However, they all differ from what Bakkt offered, since they do not imply a real purchase of bitcoins, but settlement of the transaction in the form of dollar payments. It is carried out as follows:

• The futures stipulate the purchase price of bitcoin forcertain date. If the market (spot) price of this asset is higher than the agreed price, then it turns out that the contract is beneficial for the buyer, since he gets the right to buy bitcoin cheaper than the market price. For the other side of the transaction, this, of course, is disadvantageous.
• Since this second side of the deal should notIf you sell “live” bitcoin, then it pays the difference between the spot and the agreed transaction price to the potential buyer of this cryptocurrency, and the contract is considered settled on this.
• If the situation is such that the spot priceIf it is less than agreed in the futures, then the payment in the amount of the difference between the agreed price and the spot is paid to the second party to the transaction by the one who planned to purchase bitcoin - for him such a contract becomes unprofitable, and in order to exit it, he is forced to pay “compensation”.

The unique advantage of an option contract

What is the difference between an option and a Bitcoin futures (BTC)? An option contract is to buy (call) and sell (put).

The call option contract has, like futures, twoparties to the transaction: the buyer of such an option pays the option premium to the second participant. What does he get for it? The opportunity at some point in the future to buy bitcoin at a predetermined price (strike).

However, unlike futures, the buyer of the optionhas the right to refuse to fulfill the contract in the future - in this case he loses only the money paid for the option premium. But why can he refuse to buy bitcoin in the future? This will happen if the spot price is lower than the strike price, since it is unprofitable to buy bitcoin at the agreed price, if it is possible to buy it cheaper on the market. If we are talking about the put option, this means buying the right to sell bitcoin in the future at a predetermined price, with the same settlement mechanism as with the call option, only the buyer of the put option will refuse to exercise it when the spot price is above the strike price.

The platform on which options are traded mayassign a commission for their services from each contract sold - this is also what Bakkt intends to do, where starting from January 1, 2020, the site will take $ 1.25 per contract (from December 9 to December 31, there will be no commission to stimulate demand).

Bakkt also intends to offer the opportunityto the second parties to the transaction, when they need to sell bitcoin, choose to either carry out such an operation or provide the buyer with equivalent spot price compensation in US dollars. That is, unlike deliverable futures, Bakkt's bitcoin options will not necessarily bring investor money into bitcoins - only if they want to.

Bakkt operated by IntercontinentalExchange (ICE), the operator of NYSE, the largest-performing classic stock exchange, will also “transfer” the appropriate convenient conditions for trading Bitcoin options on Wall Street. We are talking about trading options grouped in whole lots, the availability of analytics on contracts, as well as the possibility of clearing, that is, a convenient way to automatically resolve disputes on such transactions taking into account open accounts in bitcoins and / or US dollars in Bakkt.

For professional Wall Street investorsBakkt also has its own custodial services for Bitcoin, similar to those provided by the Depository Trust and Clearing Corporation (DTCC), which holds 99% of all US corporate securities, and the NYSE ultimately trades almost only DTCC receipts for certain financial tools.

Bakkt and CME Group don't want to annoy CFTC: triple insurance

There is also a subtlety in formulating whatlies at the heart of the Bakkt call option: formally, it’s not about Bitcoin itself, it’s about Bitcoin futures with a time step up to the execution date of one month (Bakkt has futures in steps of a day, but they will not be involved in option trading, at least least so far). Thus, Bakkt decided to play it safe again, fearing a negative attitude from the Commodity Futures Commission (CFTC).

• Firstly, as mentioned above, participants in option transactions will have the opportunity to settle everything in US dollars.
• Secondly, formally we are talking about the fact that the basicAn asset for an option is not Bitcoin itself, but futures for it. But, given the fact that futures require mandatory execution of the transaction, it can be said that the option from Bakkt is issued on bitcoin itself, especially since so far the trading platform has only delivery futures for the first cryptocurrency.

However, as it turns out, this is only for now: the fact is that on November 12, during the Invest: NYC conference, Bakkt operations director Adam White said that before the beginning of 2020, Bakkt also intends to acquire settlement (non-deliverable) bitcoin futures, which many other competitors in the market are already trading. Although it was said that these contracts will appear on the Bakkt platform in Singapore, given the global nature of trade, it is clear that they can also arise in the United States. Moreover, for CFTCs they are more acceptable than delivery contracts for bitcoins.

Which means Bakkt intends tomake secure a third time. Options can be easily launched, even in case of increased pressure from the CFTC, provided that the underlying futures for bitcoin can be defined as “non-deliverable”. Then all options trading will be completely in the dollar zone and will not unnerve the CFTC with the fact that Wall Street players will start to buy bitcoins “for real”.

The recent announcement can be assessed in exactly the same way.CME Group: On November 12, the exchange announced that on January 13, 2020, it will begin offering call options based on non-deliverable monthly futures (which it already trades). The value of the underlying asset will correspond to the “weight” of one futures - 5 BTC, and the lot size - at least five contracts. All this formally can indicate the possibility of a large amount of “dollar trading” in bitcoins, but zero involvement of investors in the purchase of real bitcoins.

CFTC insidious executives

The fact is that the CFTC has “its own scores” with bitcoins,there is no doubt. The former head of the regulator, Christopher Giancarlo, recently admitted that US officials gave the green light to Bitcoin futures for CME Group and Cboe “with the hope of bursting the cryptocurrency bubble.”

And indeed, the rise in the price of bitcoinIt started long before December 17 - November 14, 2017, from the level of $ 6,700, and as a result, it reached the level of $ 20,085. The next day, CME Group launched the trading of non-deliverable futures for bitcoins, and the cryptocurrency, having held for some time at the peak, rolled down, having gone as a result to the level of about $ 3000.

It is interesting that as the head of the CFTC, Giancarloearned the nickname “Crypto Dad” for his favorable attitude toward cryptocurrencies, but he ended up being quite insidious. Exactly the same positive statement by the new head of the department, Heath Tarbert, regarding cryptocurrencies must be taken with a certain degree of caution.

The launch of deliverable futures on Bakkt took place inthis year, the effect was similar to that of non-deliverable futures contracts, only the rate of decline in Bitcoin was slower. Thus, from the level of $10,062 noted on September 23, Bitcoin quotes dropped to $8,662 on November 15. At the same time, the demand for such instruments is growing: on November 8, another maximum was updated, and a daily trading value of 1,756 contracts, or $42.5 million in dollar equivalent, was reached.

Option trading in truncated assortment

Bakkt intends to offer only options so farcall, and only the so-called European contracts, as well as all other other competitors in the market. If we talk about the last characteristic of such contracts, then we are talking about the following: in the classical world of finance, there are three main varieties of options for the temporal characteristics of the exercise:

• European
• American
• Bermuda (began to initially be traded in Bermuda)

European common in the financial marketThe Old World and in the world, suggest that the date of execution is only a specific day, and given the great volatility of Bitcoin, it is a specific time of execution on that day. American options suggest that their buyer can find a convenient time to exercise them over a continuous period of several days. Finally, Bermuda options are options that can be exercised on discrete, separate, dates.

Thus, while the launch is onlyone of the many types of options that can vary not only by the principle of call-put, three types of temporary execution, but also by other characteristics. For example, by limiting the maximum losses of the second participant in the option contract, when the amount of maximum compensation that he must pay is determined in advance if the spot price sharply “goes to the moon” compared to the strike.

Lack of a complete set of “assortment” of optionsmakes it impossible to implement most complex hedging strategies. So, the call option makes it possible to hedge the risk of a sharp increase in the price of bitcoin, but very limitedly - its decline. Since the size of the option premium is usually a small amount (several tens of dollars), mining companies can sell the risk of a drop in the price of bitcoin by this amount by selling such contracts.

The final benefit for cryptocurrencies from options will be inevitable

That Bitcoin futures are causing a fallmarket, or at least their launch, obviously. Researchers from Arcane Research believe that such tools have a negative impact on the price of Bitcoin. Entrepreneur Mike Novogratz still remains optimistic, pointing out that such derivatives are also generating interest in Bitcoin itself, even if it is not about buying it.

At the same time, cryptocurrencyDerivatives open the way for institutional players to manipulate the price of Bitcoin, as analyst Willy Wu points out. At the same time, the word “option” itself has a magical character: it is associated with the instrument that allows companies on Wall Street to always gain profit in any market situation for their assets.

Of course, there will be options trading on Bitcoinmay be limited in a number of ways, but there is no doubt that it will become increasingly diverse in the future. This means that the launch of options, whatever they may be, is another factor in the inevitable long-term growth and development of the Bitcoin and cryptocurrency market in general, as well as reducing its price volatility in the long term.

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