Digital currency derivatives are playing bigger and bigger.

Editor’s note: This article comes from the strategic cooperation blockchain media “Odaily Planet Daily” (Public ID: o-daily, < a href="https://download.odaily.com/">APP Download)

Author | Huang Xuezhen Edit | Lu Xiaoming

Products | Odaily Planet Daily (ID: o-daily)

I spend $5,000 to buy an option, and the bet bitcoin goes up to 350,000

I bought a quilt cover, and I don’t want to buy it. It can be said that it is an eternal entanglement of small leeks.

I don’t say anything else here, just a kind of hedging tool that I’ve been familiar with recently—options, or permission to solve this problem.

An option is a right that gives the holder the right to purchase (or sell) an asset at a fixed price on a particular date. It can be small and “get the same income with a cost of 1/10.”

One month, options have been launched by various exchanges as “net red items”, which has also worried some practitioners.

“The high risk of the currency market, the gap in user perception, the zero entry threshold, and the ease of exposing itself to high risk, have these exchanges been considered?”

Nature, this is also a question that exchange players are thinking about. This market is prosperous, stable and healthy development is a prerequisite. The contract that was first introduced was referred to by many currency people as a “coil meat grinder.” Can options get rid of this fate?

Options, can you help you not to be vacant?

A real example of a LedgerX (a cryptocurrency derivatives provider based in New York).

According to the Wall Street Journal, in May of this year, an unidentified trader (let’s call it an old K) optimistic about the price of the currency rose to more than $50,000 a year later. If he takes out the coin at this time, he needs to invest $7,600. As a result, if the price of the currency falls after one year, the principal of the old K will be discounted.

Old K did not do this, but chose to buy 30 call options (one option corresponds to one bitcoin). The contract stipulates that from the date of purchase to June 2020, the old K can buy for $50,000. Bitcoin. According to the transaction record, he spent $4,500 on the option product.

If the price of the currency does not reach 50,000 US dollars (that is, about 350,000 yuan), the money of the old K will be directly squandered. However, if the price of the currency exceeds 50,000 US dollars, such as rising to 100,000 US dollars, the old K will earn.

Compared with spot trading, option contracts can withstand the risk of future price deviations from expectations, and can be small and large, as the so-called “only 1/10 of the cost, you can get the same income.”

The above we talked about the buyer of the call option, then what about the seller?

It is still taking the old K as an example. For the recent correction of the market, he may judge further down after the sideways. Therefore, the old K who wants to arbitrage sells the “call (call option)”, that is, after a week, the bitcoin is sold at a certain price, such as 9,000 dollars.

As the buyer’s counterparty, the seller (old K) can get its “rights” regardless of whether the buyer is exercising or not. If the future price of the currency really falls, the counterparty will probably choose not to exercise the right. At this time, although the spot in the hands of the old K has depreciated, the loss can be appropriately hedged by selling the option; but if the price of the currency rises, the buyer exercises the right, then the old K It is necessary to fulfill the obligation to sell assets (the seller’s old K can also be called a compulsory warehouse).

In order for the old K to perform, the futures exchange will usually charge him a certain margin. This margin is similar to the margin in the contract. When the market develops in an unfavorable direction, that is, when the price of the currency rises, the old K needs to pay the margin. Otherwise, the trading platform will find that the old K is unwilling or unable to perform, and the old K’s margin is mandatory. Closing positions (called “hedging” in the options market). To put it bluntly, the old K has no chance to play, and his selling rights will also be taken over by the new seller (it can be seen that the demand market has a very high demand for liquidity). The difference with the contract is that if the buyer gives up the exercise, the deposit will be refunded to the old K.

Miner: Why do you recommend me to play options?

Who likes to play options?

Miner, probably the answer I heard the most.

“Using options to build a hedging portfolio can help miners secure the lowest yields for mining while maintaining the potential for higher returns,” said Chen Xin, founder of Binance JEX.

BHEX founder Ju Jianhua also said that at the current stage, the fluctuations in currency prices and the increase in computing power have caused great uncertainty in the mining revenue of miners, and hedging options can be used for hedging. , hedging risks.

OKEx Senior researcher Li Lianxuan divided the participants in the options market more carefully, with speculators, hedges and arbitrage.

Obviously, miners are hedges.

Li Lianxuan explained that miners can buy the “selling of bitcoin for $1,000 after 1 month” in the options market, and the price of the bitcoin can be locked in one month after paying the option fee. . After a month, if the price of the currency rises, then the miner canDo not exercise the right to sell, loss of the option fee, but can get the benefits of rising currency prices.

Of course, the miner can also act as a seller and sell “calls (call options)”. For example, the miner sells the option of “buy bitcoin for $9000 after one month”. After the transaction is successful, the miner is equivalent to paying the currency pending order in advance, thereby locking the currency price and additionally obtaining the premium from the buyer. .

Either way, the miners will be able to hedge the currency.

How many miners choose options is not known, but options are attractive to many futures users.

JEX launched its options products in early 2018. “We currently have a significant number of stable users, many of whom are doing futures trading.” Chen Xin also told Odaily Planet Daily.

“What is the biggest complaint of futures users? That is, the high leverage of futures makes decision making more frequent and difficult. There is often a 10-20% volatility that faces a burst, and users have to operate in real time and watch at any time. And if the option user has a big ups and downs in the opposite direction during the contract period, there will be no risk of a burst.” Chen Xin said.

New Derivative Battlefield for Giants

Like other financial instruments, options are born out of market demand. Fortune-sensitive exchanges have long been on the track and ready to go.

Cianan acquires JEX, OKEx, BitMEX, CME and Bakkt and other exchange giants are also about to launch online options.

“A highly competitive market, only companies that are constantly innovating can survive. You don’t have to do other companies naturally. This is why traditional financial markets continue to show new types of financial derivatives, large and medium-sized exchanges. The reasons for the successive launch of contract products last year. Now, through futures products, these companies also have certain derivatives technology reserves, and the introduction of option contracts is a matter of course.” Li Lianxuan said.

The exchanges that are entering the market are also based on the judgment that “the options market is broad”.

OK Xu Kun, vice president of strategy, said on Weibo that “the market space for derivatives in the traditional financial market is more than ten times that of the spot market. Like digital currency, the future derivative space is very high.”

LedgerX CEO Paul Chou admits that LedgerX’s assets range from $10 million to $1 billion for institutional clients to express interest in new derivatives. “I understand that Bitcoin’s $100,000 is a big number, but many people in this field remember the bitcoin’s $1, and then it’s $10, $100, $10,000… (so many big customers are We are not surprised to avoid buying low-cost coins. We want to buy Bitcoin options contracts at an agreed price (lower price) in the future.”

Chen Xin concluded that the gradual outbreak of the options market is on the surface of the need for exchanges to maintain heat. Inside, options and futures are basic derivatives. When the number of users in the spot market and the volume of transactions reach a certain level, the cornerstone of this financial system is bound to be added.

So, with the influx of traditional exchanges that can “provide compliant options products”, what are the advantages of native players in the currency circle?

BHEX Exchange Options Product Leader Boli divides market competition into “two worlds.” “The US Compliance Exchange is one world, and the other exchanges are another. Non-Americans are having trouble opening a bank account in the US, let alone trading in compliance transactions.”

The futures have not yet understood, and now you have to play options?

We all know that futures contracts have become a battleground for military strategists because their gold-absorbing effects have been fully verified. So what about options?

Either LedgerX, JEX or BHEX have not disclosed their own “competition”. The only one announced was the derivatives exchange Derbit, whose BTC option day transaction amount reached $25 million at the peak of January this year. This achievement can be achieved when the market is in its infancy, and it is still very imaginative.

However, the futures contract that was first introduced is still referred to by the majority of the currency as the “coil meat grinder” and “super high-speed harvester”, and the risk of options is not low. For example, if you do not set a stop loss line for the obligation position of the option, it means that the obligation position may have unlimited losses.

For example, if a buyer buys an option, he can buy Bitcoin for $10,000 in 1 month and pay a $1,000 premium. After January, if Bitcoin falls to $5,000, the buyer will lose a maximum of $1,000 and the seller (obligatory) will earn $1,000. Conversely, after one month, bitcoin rose to $20,000, the buyer earned $9000 and the seller lost $9000. The potential loss of the seller is much larger than the potential income of $1,000.

The high risk of the currency market and the gap in user perception have made A Sa, a currency trader from the traditional financial industry, worried.

“In the contract market of the currency circle, most users even trade the rules of the futures contract without fully understanding them, exposing themselves to high risks; the design of option products is more complicated than futures, can users A complete understanding is still a question mark.”

A Sa also used traditional option products to make a comparison. “Looking at the requirements of the domestic options market for qualified investors, the threshold is quite high. This is to protect the interests of investors and require participants to have relevant majors. Knowledge and investment experience, the most important thing is to have a certain risk tolerance. The digital currency options exchange directly reduces its threshold to 0.Corresponding to this is a sharp increase in risk.

“The traditional domestic option market has only developed for a few years. With such a complicated financial product, the currency exchange is busy on the line. Is the market risk taken into account in the future? The exchange rashly puts retail investors in the high-risk investment market. I feel less responsible,” the trader reiterated.

The other person in charge of the quantitative team also agreed that “the currency people who don’t understand can play the options casually. To put it bluntly, they come in as gambling, lose millions of losses, and frequently defend their rights, which will affect social stability.”

Zero user access threshold is the result of the lack of effective supervision of the exchange.

“Now-term futures contracts are all playing the ball, not to mention options. But in the United States, the supervision is relatively perfect. In order to provide option services to US investors, it is necessary to apply for relevant licenses, otherwise it is illegal.” The person in charge of the compliance business said.

It is true that this market is prosperous, stable and healthy. Exchange players are not unaware of it, but the road to compliance is a block of Achilles in this industry.

Although there is no policy, many derivatives exchanges are still in the long run and are still trying to regulate themselves.

For example, LedgerX is the education market, and recently introduced the simplest binary options to users to “small test”.

This product is called Bitcoin Halt Contract. The contract stipulates that the user selects one of the five days of March 27, April 24, March 29, June 26, and July 31, 2020, if the halving of Bitcoin occurs on the selected date. Before 16:00 ET, then each contract will receive a reward of $100. On the contrary, the contract buyer will not get anything. Is it very simple and easy to play?

JEX and BHEX platforms also strive to protect user interests from user education and product settings. For example, JEX provides options education videos, regular training courses, and simulation trading.

After five years of development, the number of currency futures gradually reached the market education and user outbreaks. We really should leave some time for new products, and investors need to be very cautious.