The relationship between Bitcoin and Bitcoin options can be likened to that between a mother and her child. While both have the same DNA, and share a number of physical/biological similarities, they are not of the same body — with the child being an extension of their mother. In the same way, Bitcoin options can be perceived as an extension of Bitcoin.
We already know why BTC is sold and is currently the biggest cryptocurrency by market cap: High demand. However, Bitcoin options (and other derivatives) are sold because they serve certain specific purposes, which we shall explore in detail below.
Hedging Hedging is one of the most common reasons for trading futures or contract options.
To understand hedging, picture a garden close to a river or water pathway. It's safe to presume that such a piece of land will, sooner or later, get washed away by the force of water currents. In such a situation, the owner of the land builds a fence or hedge around it to shield it from erosion.
This example is a close, albeit simplistic, representation of hedging in the financial markets. Investors (and miners of Bitcoin) hold an asset whose value could be “eroded” or "washed off" by the forces of supply and demand. An options contract "shields" the value of the underlying asset — in this case, Bitcoin — by "locking" its value, i.e., the price at which Bitcoin can be traded for money.
Price Speculation Traders and investors use contracts such as options to express their short-term sentiments (bullish or bearish) on an asset.
To understand this better, remember that when an asset is bought, it’s usually believed that the asset will be more valuable in the future. When the asset records a substantial increase in value, you can profit by selling off an amount of it.
What happens, however, when you feel a bearish run is imminent in the upcoming months? Although the underlying asset's price may bounce back after a while, by purchasing a put option you would maximize your chance to make some profit.
The Benefit Of Leverage Here’s another reason Bitcoin options are increasingly traded over Bitcoin itself: Trading an options contract provides you with the benefit controlling a larger trade size than the amount of capital you used to initiate the position. For example, for a relatively small premium amount of, say, $500 or $1,000, you can control one bitcoin which could be worth $20,000 or more.
Expiration Dates Expiration dates refer to the agreed date on which the contract option — the option of either buying or selling — is to be exercised. Note that not every Bitcoin options contract can only be fulfilled on its expiration date; some can, in fact, be exercised before the expiration date. Below, let's look at the two methods of contract fulfillment.
European-Style Options Contracts European-style options contracts mandate the holder to fulfill only the terms of the agreement on the date of expiration. Even if a contract is in the money (ITM), the holder can't exercise their option until the set date, on which the fortunes of such a contract may have reversed.
A European-style contract requires higher accuracy in speculation than its American counterpart. At the time of this writing, major Bitcoin options trading platforms offer only European-style contracts.
American-Style Options Contracts Options contracts styled in this manner give the holder the privilege of exercising the contract before the expiration date. If a contract is ITM, the holder can decide to use their trade option, thereby making a profit.
The American way of doing things implies that a much lower degree of accuracy in speculation is required. Making a profit requires the contract to be ITM any time: Between the date entered and the expiration date.
How to Trade Bitcoin Options Bitcoin options are offered on several exchanges, which have different methods of allocating contracts. For example, on a crypto exchange, the options contract is upheld directly between the customer and the exchange.
To enter a contract option, the user chooses the amount of Bitcoin they wish to trade the options contract on, thus determining the premium. Since the trade takes place between the user and the exchange (using a computer program), if the value being lost by the user were to pass a threshold, the user would be liquidated to restrict losses, with the only money lost being the premium.
On some other exchanges, a user "writes" a contract and waits for their contract to be matched by another who orders to purchase a contract with similar terms to the writer. The exchange regulates this trade, and a fee is charged to ensure fairness.
On Mcoex, Bitcoin options can be bought via Derivatives –> USDT Options (see image above).
Are Bitcoin Options A Good Investment?
To the Bitcoin miner, options can keep their rewards at reasonable levels when implemented carefully. To the Bitcoin investor, Bitcoin options are a good way to speculate on the rise and fall of Bitcoin. Even if BTC is bleeding red, you can make money like a true businessperson.
To the investor who wants a "feel" of the market without prior experience with Bitcoin or cryptocurrencies, no worries: There's an option (pun intended) for you in the form of Bitcoin options contracts. (Editor’s note: Please ensure that you’re educated on the risks involved. Only go for options trading if you’re comfortable stomaching the level of risk).
Conclusion The goal of every trader and businessperson is to make a profit; no one sets out to lose. Due to the sophisticated nature of economic systems, this goal is now more achievable than ever. With the growth of cryptocurrencies, Bitcoin options have been gaining popularity in recent years as well.
On the flip side, more ways to make money means more ways to lose money. Crypto options require caution and not (ideally) a mindset of "get rich quick." In order to maximize your gains, you'll need plenty of patience, as well as the ability to spot opportunities and act on them quickly.
We hope this guide has helped you grasp the fundamentals of BTC options. As long as you do your research and understand the risks, you’ll be set to purchase your first Bitcoin option.