What are Crypto Options? DeFi Options Trading Explained - FXLeaders

What are Crypto Options?

Cryptocurrency options are derivative contracts that give the holder the right but not an obligation to buy or sell an underlying asset at a given price on a future date. The term “derivative” is used, because one asset derives value from another. The right to purchase an underlying asset is referred to as a call option, while the right to sell is called a put option.  

How do crypto options work?

Cryptocurrency options work by giving the holder a right to buy or sell a crypto asset at a given price in the future. The options can be categorized into American or European options. The American option allows the buyer to exercise the contract at any period before it expires. A European option can only be exercised at the time of expiry. However, the European options can be disposed of or cleared out before the expiry date. 

Cryptocurrency vs. traditional investing options?

Cryptocurrency vs. Stocks

Cryptocurrency options differ from stock options because the cryptocurrency sector is relatively new. For the stock options, investors have historical data to predict future possibilities. Cryptocurrency options carry more risks. Crypto assets are decentralized and are not governed by a single entity. Stock options have corporations behind them, whose actions would affect the underlying asset price. The open-source nature of cryptocurrencies makes it harder to predict the price events of the underlying asset.

Cryptocurrency vs. the Forex Market

Foreign exchange investors buy and sell foreign currencies to profit from the fluctuating exchange rates. The profitability of the currencies is pegged on the economic conditions of specific countries. If the economic conditions are characterized by high inflation and low GDP, the value of the currency will drop. On the other hand, cryptocurrencies are a universal digital asset that is decentralized. No single economic situation of one country can affect the price. 

Cryptocurrencies vs. Bonds

Bonds are debts extended from an individual to a corporation or a government entity. The bondholder receives regular interest payments until the expiry date, when the principal amount would be paid. While the risk inherent in cryptocurrency assets lies in volatility, the risk in a bond market is that of the issuing entity going bankrupt. In that case, the bondholder may lose the interest and the principal amounts. 

Cryptocurrencies vs. Commodities

Commodities, like the precious metals, gold and silver, are similar to cryptocurrencies, because they derive their value from market sentiments. The difference, however, is that of convenience. While commodities require lengthy and costly shipping costs for physical security of the asset, cryptocurrencies can easily be transferred from one wallet address to another or staked for a return in the DeFi protocol. 

Bitcoin Options

Bitcoin options are traded as call and put options, like the traditional markets. Investors pay a premium for the options for settlements at a specified future date. The call or put options can be settled in cash or BTC. The cost of Bitcoin put or call options are relatively expensive, because of the volatility in Bitcoin assets. 

Ethereum Options

Traders buy Ethereum options to speculate on a rise or decrease in the price of Ether. The underlying asset is ETH. Users can settle their transactions in cash, where the writer of the option pays the holder at the price of Ether when the term expires. 

Best platforms for decentralized options

Deribit

Deribit is a cryptocurrency options trading platform that is based in Panama. European options on Deribit are settled automatically. The platform provides cash settled options. In the option, the writer pays any amount due to the holder instead of transferring the actual asset. Deribit also allows for the trading of cryptocurrencies with leverage. 

Binance JEX

Binance JEX is a Bitcoin futures and cryptocurrency options platform. The platform features cold and hot electronic wallets, with offline private keys to maximize the security of the exchange. Binance JEX lists Bitcoin and Ethereum futures transactions and other services for cryptocurrency options transactions. 

PowerTrade

Powertrade is a cryptocurrency options exchange offering options priced in USD, with a standard portfolio analysis of risk. PowerTrade offers options and derivative trading for major cryptocurrencies, like Bitcoin and Ethereum. The platform supports web and mobile browser interfaces in providing a seamless trading experience. 

Fidelity

Fidelity incorporates crypto options research, analytics, idea development tools and a seamless trading ticketing procedure. The options platform is open to anyone once they have filled an options application form. 

About the author

Eric Nkando // Financial Trader and Technical Analyst
Eric Nkando is a professional forex trader and financial analyst from Nairobi, Kenya. He has 3 years trading experience, with interests in Forex, cryptocurrencies, and commodities. He is a CPA(K) holder and a B.com degree (Finance) graduate. Eric’s market analysis and coverage have featured on leading financial websites including Wikifx and Seeking Alpha