An overview of crypto option market: far lagging behind futures
As one of the financial derivatives, options are low in risk but high in security. It plays various functions, from leveraging to risk hedging, and among others. It thus represents the most important investment tool in the financial market and has been extensively used in stocks, foreign exchange, precious metals or commodities. According to the statistics about 2020 derivatives trading in major global exchanges, a report released by the American Futures Industry Association (FIA) in January this year, the trading volume of options reached 21.22 billion lots, standing at the same level as futures trading. Both exceeded spot trading.
In the historic trading frenzy among retail investors that happened at the beginning of this year, options were the most important investment tool: retail investors used a small number of funds to buy GME call options with a hundred times leverage, making the price grow sevenfold in two weeks. This cost Wall Street financial institutions billions of dollars and further forced them to buy stock and cut their losses. But for investors, they reaped massive benefits from this riot.
The power of options is well demonstrated in this unprecedented battle. That is, institutions shorted a stock and bought a large number of put options. Retail investors took countermeasures and resorted to call options that greatly magnified their benefits.
Centralized Crypto Options: Deribit being the unicorn
In the crypto market, the scale of options is also gradually expanding. According to Bybt’s data, in the past year, the holdings of bitcoin options have gradually increased, particularly when the market is in high volatility. In March this year, the holdings of bitcoin options were close to $30 billion and the number of exchanges offering options has also been on the rise since last year. Both crypto giants such as Binance and professional option exchanges are providing crypto options trading.
Another dataset from Bybt provides us with more insight into the pattern of the current crypto option market: more than 90% options transactions are concentrated in Derbit. In other words, Derbit is a unicorn company that has no rivals.
Meanwhile, the total trading volume of bitcoin futures in March reached $2.13 trillion which is 70 times that of options. In terms of the share of trading volume, the top three exchanges were Binance (33.84 percent), Huobi (22.32 percent), and OEC OKEx (13.75 percent).
The growth of crypto options, the dominance of Derbit, as well as the gap between trading volumes and futures demonstrate both underdevelopment and potential of cypto options. The existence of DeFi will further fuel its growth.
However, options trading requires a very high level of professionalism. In crypto options trading, there is a joke that “you will lose money even if the price remains stable”. Besides that, it is also very stringent with liquidity and trading depth. Deribit has managed to be the industry leader on both counts and hence, accumulated a high market share.
Deribti offers European options with various delivery prices for BTC and ETH to meet the needs of investors who use options for leverage or risk hedging. It has excellent depth, and mostly, there are over 50 orders for options of the same exercise price.
An important reason why crypto option products have not been popularized is the concern over risks characterized with centralization, especially in the crypto market where market regulations are yet to be completed. Therefore, derivatives, especially options in the DeFi field have attracted extra attention from investors who desire safer option trading without being exposed to centralized risk.
DeFi Options: more competitors getting on board
The main competitors in the DeFi options market include OPYN, Hegic, Finexus, etc. In addition, spot DEXs such as Sushiwap are also developing DeFi option products.
Due to the performance limitations of the blockchain, especially Ethereum, current DeFi options are still simple and basic products. There are no obvious leading projects. Everyone is exploring solutions.
OPYN is an early project that has been engaging in the development of on-chain options. It basically moves traditional options to the chain, which costs a lot of gas fees and further leads to insufficient option liquidity and trading depth. At present, the options offered by OPYN have many limitations. There are not many choices for exercise dates and price. In a rapidly changing market such as cryptocurrency, its hedging effect is obviously not flexible enough. According to the figure below, OPYN only offers Bitcoin options with an exercise price of $56,000 and $60,000 on April 30.
Hegic and Finexus adopted the AMM model to solve the liquidity problem, which has greatly enriched option products. The existence of the AMM capital pool allows users to independently choose an exercise price without worrying about the risks of counterparties.
Through adopting the AMM model, Hegic and FinNexus option products are more flexible, and the size of their liquidity pools for options transactions becomes very critical. On April 13 Hegic’s BTC pool has 420 Bitcoins and the utilization rate was 2.5% while the ETH pool boasts 13192 Bitcoins and the utilization 83%, indicating that ETH option trading is much more active than BTC option trading.
Hegic provides option products with exercise dates of 1 day and 1 to 4 weeks. Users can choose the exercise price as per their preference. Since October, the total number of options transactions on Hegic has amounted to about 5,500, and the total transaction volume has reached $300 million.
While performs very well in DeFi world as indicated by these data, it is still far behind centralized exchanges in which options trading of bitcoin reached $9 billion in March. Such a distinct difference can be attributed to such factors as on-chain transaction fee, as well as the scale, security and revenues of capital pools.
Trailblazer: unleash demands for DeFi options and expand the market
In this new round of market competition, Option Panda has the potential to achieve higher goals and further improve the data performance of DeFi world. It has made a lot of innovations to better utilize AMM capital pool.
While Hegic puts different assets in separate pools, Finexus uses a unified pool for all its assets. When it comes to Option Panda, it puts different assets into their respective call and put pools. Each pool has an upper limit when issuing options with maturity dates. This helps to keep the option issuance caps with different expiration periods evenly distributed, which further contributes to controlling the concentration risk faced by underwriters. Option Panda also sets a 75% cap on the utilization of each option pool to control liquidity risk. These measures can help market makers avoid risks and find more profit opportunities, which will promote the expansion of capital pools. Option Panda’s options products are mostly short-term options that expire within 15 minutes to 1 hour, which is suitable for professional traders who frequently engages in transactions. This design echoes the fast-changing character of the crypto market, and thus caters to the needs of crypto investors.
These features may evoke more demands for DeFi options.
The trading volume of crypto options is only 1 / 70 of traditional options, and when it comes to DeFi options, they make up a negligible part of centralized options. This means that there is huge market potential to be unleashed. As competition in DeFi options is growing more fierce, we will see in the crypto world the trend of more innovations, faster network speed and lower fees, all of which will help to usher in the era of DeFi options.
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