Although it has taken some time to come to fruition, demand for traditional derivative markets in the cryptocurrency trading arena is growing at an exponential pace. While the presence of Bitcoin futures trading has been around for some time now, it wasn’t until this year that a select number of platforms opened their doors to cryptocurrency options.
This week, CME Group announced it will launch Bitcoin Options trading in Q1 2020. These are big news whom are also highly fundamental for the experienced trader. Not only do options contracts offer users the ability to hedge against the risks of a sudden change of market direction, but they are also a useful speculative tool, too.
For example, let’s say your current Bitcoin portfolio is looking healthy, however, you feel that an impending bear market is imminent. By purchasing a put option, you could limit your losses in the event that the market does in fact go into an extended bear run. If it doesn’t, you simply lose your options premium.
With that being said, if you’re a keen trader that is looking to get exposure to the crypto-centric derivatives space, we’ve listed three of the best cryptocurrency options exchanges currently in the market.
Launched in 2016, Deribit is an Amsterdam-based exchange that specializes in crypto-centric futures and options. More specifically, the platform allows users to purchase European-style cash settled cryptocurrency options across both Bitcoin and Ethereum. In layman terms, this means that options are exercised once the expiry date matures.
Moreover, any subsequent profits made by the trader at the point of expiry will be paid in cash, as opposed to a less desirable asset transfer. For those looking to use the Deribit platform, the exchange charges 0.04% of the value of the underlying contract, or simply 0.0004 per BTC/ETH contract.
In terms of safety, Deribit keeps 99% of customer funds in cold storage, with the remainder kept for the facilitation of withdrawals. Moreover, the exchange prides itself on its stringent internal security controls, with Deribit accustomed to no hacks in its three years of operation.
Finally, and perhaps most importantly, the underlying infrastructure at Deribit is highly conducive for high frequency trading. In fact, traders even have the option of renting a server to reduce latency times down to just ~0.1ms. This is one of the many reasons that Deribit has acquired large waves of users from fellow crypto-derivative competitor BitMEX who have since become frustrated with ongoing latency issues.
LedgerX is a US based exchange that offers Bitcoin spot, options, and futures contracts. The regulated platform is overseen by the US Commodities Futures Trading Commission (CFTC). Although the exchange was initially targeted towards the institutional investor space, LedgerX recently received the green light from the CFTC to offer derivative products to retail clients.
In terms of its options offering, LedgerX currently offers strike ranges from $2,000 right up to $50,000. As such, its derivative threshold will appeal to both proponents and sceptics of the cryptocurrency space. Moreover, it was recently announced that the platform would be launching a $100,000 call option with a December 2020 expiry date – perfect for those that foresee the digital gold ‘mooning’ in the very near future.
Finally – and in a slightly less positive note, although LedgerX recently announced that it was set to become the first cryptocurrency exchange to settle Bitcoin derivative contracts in Bitcoin as opposed to a conventional cash-settlement, the platform appears to have run into a potential regulatory hurdle.
Quedex is a Gibraltar-based futures and options exchange that is in full possession of a Distributed Ledger Technology (DLT) Provider license, which is overseen by the Gibraltar Financial Services Commission. The platform specializes in European Vanilla options – which much like in the case of Deribit, means that options are financially settled and thus, there is no asset transfer upon expiry.
Furthermore, options trading at Quedex is standardized to futures, meaning that they are effectively inverse options. As each option has a nominal value of $1, this allows traders to hedge on other derivative platforms. On the other hand, it must be noted that trading volumes are still somewhat minute on Quedex, although arguably, the platform itself was only launched in December 2017.
Nevertheless, in terms of its options settlement fee, Quedex charges 0.03% for market takers, and nothing for those proving the exchange with liquidity.
Traders at the exchange have the ability to purchase contracts across three maturity periods. Notably, this includes BTC/USD options that expire on a weekly, monthly or quarterly basis.
The Future of Cryptocurrency Options is Among Us
With the traditional derivatives industry responsible for trillions of dollars’ worth of annual trading activity, the introduction of crypto-centric options exchanges is a big deal for the digital currency arena.
However, it must be noted that these asset vehicles are not for the faint hearted. Make sure that you are fully versed in the underlying risks of trading options, and most importantly – only use trusted exchanges such as the likes of Deribit, LedgerX or Quedex.