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Cryptocurrencies cannot remain the same forever. However, the push to expand blockchain-based finance into new, useful, or wealth-generating areas has proven more difficult than anticipated.
However, cryptocurrency derivatives got Derivatives are such a staple of traditional financial markets that they are often part of the compensation packages of employees joining startups or already public companies.
But crypto derivatives don’t exactly mirror their fiat counterparts. Like other aspects of blockchain technology, the “hidden” technology and infrastructure means they don’t always work in a way that traditional market drivers do.
Yes, crypto derivatives like options create the opportunity to profit from the industry’s volatility and response to social and political changes. EventsBut traders actually have two ways to deal with this.
Today, many crypto derivatives platforms only offer options trading based on inverse contracts, which use cryptocurrencies like Bitcoin (BTC) as the underlying asset and collateral. This essentially means that the value of the contract is inversely proportional to the price of the underlying asset. If the price of Bitcoin rises, the value of the contract falls, and vice versa.
Under this model, profits and losses are settled in the cryptocurrency itself – exposing traders to higher volatility and more complex pricing dynamics. This can be preferable for traders looking to speculate on the price volatility of an asset through direct exposure, especially during a bearish market. Similarly, traders stand to potentially generate higher returns by taking advantage of price movements in options and positions in the underlying currency, especially in highly volatile markets. Inverse contracts also allow for more advanced hedging strategies where traders can hedge options and underlying assets in one go.
On the other hand, traders are exposed to uniquely high volatility risks due to the pricing mechanisms of inverse options contracts. Since the value of the option and The underlying asset prices impact returns, and traders are more vulnerable to extreme volatility – especially when profits and losses are settled in non-asset-backed cryptocurrencies. With the high risk of liquidation and unexpected gains, it’s no surprise that inverse options trading is not welcoming to new traders.
Despite the complexity, platforms like Deribit have made inverse options contracts the backbone of their platform, which It has been calculated. For more than 90 percent of crypto derivatives trades as of last July. But are inverse contracts really the only option (no pun intended) here?
Recently, Deribit’s competitors have started offering alternatives to chip away at the platform’s dominance in crypto derivatives. The most prominent exchange in this space is Thalex, which offers stablecoin-backed options trading instead of reverse contracts.
While the clue is in the name, stablecoin-backed options trading uses stablecoins as collateral for trades, creating a direct relationship between the value of the contract and the price of the underlying asset. Since platforms like Thalex offer both collateral and settlement in stablecoins, the risk of volatility is much lower while enabling the exchange to offer a simpler pricing model.
Immediately, Thalex’s appeal to traders looking for more stable and predictable returns became clear. Because the collateral is in a stablecoin pegged to fiat currency, traders have a more robust value base that is not as heavily affected by market fluctuations – and any value gains will be more certain because they are not subject to cryptocurrency price fluctuations. However, in the long run, this model could erode potential returns, which may not appeal to risk-averse, profit-oriented traders.
Sure, the stablecoin-backed options trading model offers less leverage and lower return potential in emerging markets, as well as requiring access to stable assets to participate. But for new traders just trying out crypto derivatives, this isn’t necessarily a bad thing. Likewise, more experienced or institutional traders who don’t like the high-risk, high-reward game of inverse options now have a more reliable way to pursue derivatives trading.
Crypto derivatives represent an evolution of what cryptocurrencies can do, and demonstrate the industry’s ability to match or even surpass what is possible in traditional financial markets. However, the rapid emergence of alternatives in this space also underscores the need to maintain competition and provide ways to expand access to new instruments. Otherwise, cryptocurrencies will merely mimic traditional markets rather than improve on what they offer.