With Bitcoin making new all-time highs seemingly everyday, the hype and buzz about the digital currency is palpable. Naturally, as more participants join the BTC movement and the market becomes more volatile, a lot of traders have been wondering if there’s a way to hedge or speculate by buying/selling BTC options.
Can You Trade Options On Bitcoin?
Technically, the answer is yes. As of the current moment, you can trade bitcoin options, but it’s not yet regulated in the United States. Deribit is the only liquid options exchange for bitcoin in the world.
Be warned, however, because deribit has seriously wide bid/ask spreads, although they’re narrowing everyday. We conducted a full review of the Deribit platform here.
In 2015, the Commodities and Futures Trading Commission (CFTC) banned Deribit from operating in the US due to a lack of adherence to regulatory procedures.
What a Bitcoin Option Chain Looks Like
Currently, options for BTC function exactly like options for stocks or futures.
The only major difference is the huge implied volatility and outrageously wide BID/ASK spreads. Current implied volatility for August BTC options is 120%! That’s crazy high!
When bitcoin was trading at $3,500 in August of 2017, the BID/ASK spread use to be $220.26 by $296.10. Now, bid/ask spreads are far more narrow. See for yourself on Deribit’s platform. It’s free to signup, and if you’re from the US, you can circumvent the “ban” by saying you’re from Canada. There is no verification process.
Because Bitcoin has had very wild price swings, high levels of implied volatility make sense. What this tells us is that market participants are uncertain about the direction that BTC will trade, and by how much it will trade in said direction. Hence, they are willing to pay a premium (high implied volatility) to protect their positions.
However, because these option prices are generated by an unregulated cryptocurrency exchange, it cannot be in essence fully trusted. Put it this way, no institutions are trading BTC options with these unregulated exchanges popping up left and right, it’s mainly unsophisticated retail investors.
Regulated Options for BTC Are Coming Very Soon
Due to the immense surge in popularity of cryptocurrencies in general, LedgerX was recently approved to become the first regulated digital currency options exchange and clearinghouse in the United States. They currently offer some bitcoin options and swaps, but if you think Deribit’s spreads are bad, LedgerX’s will give you a heart attack. It’s basically not tradable.
This is a huge deal for all cryptocurrency traders, especially bitcoin and ethereum.
LedgerX is based in NYC and is backed by Alphabet Inc’s venture capital division.
They’re one of the leading innovators in derivatives trading for cryptocurrencies, and in the future, they will likely be a big player in the bitcoin derivatives world.
Being able to buy and sell options on major cryptocurrencies like BTC and ETH via a US regulated exchange is a huge deal.
This is exactly how stock options started out in the US, especially weekly options, and they quickly became one of the fastest growing financial instruments, in terms of popularity, in the world.
Futures are Finally Here
Having just approved options for BTC in August, the CFTC has approved futures and they will begin trading on Sunday December 10th, 2017 at 5pm CT. Read all about how to trade bitcoin futures.
tastyworks is the cheapest and best brokerage firm that offers bitcoin futures trading to their clients. Unlike TD Ameritrade, there is no $25,000 account minimum to trade bitcoin futures. Trades start at just $1.25 per contract!
Bitcoin futures give traders a way to speculate and hedge with BTC virtually 24/6 without ever having to actually convert USD to BTC. Like the approval for options trading, the fact that futures trading for Bitcoin is in the works is also a huge deal.
Deribit also offers bitcoin futures, but these are very different that regulated BTC futures on the Cboe or CME.
The more ways there are to trade BTC, the more opportunity there is. It’s just that simple.
So You Want To Trade Bitcoin Options?
If you’re willing to take a small risk, you can try trading bitcoin options with Deribit, but exercise caution. As for bitcoin futures, if you’re going to trade those, stick with tastyworks, since they are FDIC insured and regulated.
As cryptocurrencies begin to catch grow in popularity, we eventually foresee a world where they will be heavily traded by institutions and retail investors alike around the world. The fact that futures and options trading will now be permitted and regulated in the US for Bitcoin is a massive step in the right direction for the future of all digital currencies.
