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The Bitcoin Derivatives Market Has Arrived

Tyler Durden's picture




 

Having discussed the advantages and disadvantages of the crypto-currency and noted the extreme volatility of the last few weeks, it seemed only a matter of time before some ambitious entrepreneur tried to monetize the volatility. What better way to "manage the risk" of your virtual currency horde than buying (or selling) options (in a more levered way). Predictious, the Dublin-based prediction market, this week unveiled Bitcoin Option Spreads enabling both long- and short-positions to be constructed on the already extremely volatile 'asset'. Regulatory clamp-down in 3..2..1...

 

The basic mechanism is the same as every option spread market - a fixed payoff for getting the "bet" correct, in this case 10.

In the case below, the bet was that Bitcoin will (or will not) close at $1400 on Wednesday January 1st at 12:00am,

if you believe it will (close at or above $1400) you "buy" the contract at 3.49 (and should you be proven correct you are paid 10 - thus gaining 6.51, similar to buying a call option)...

if you believe it will not reach $1400, you "sell" the contract at 0.55 (and should you be proven correct you pocket the 0.55 and pay out 0.00 - just like writing a call option)

 

Quite a skew has developed already...

As Predictious notes,

Predictious is now bringing this to the next level by offering a new type of derivative contract: option spreads on the price of Bitcoin. In the past couple of weeks, Bitcoin has been extremely volatile, and it is important for traders to be able to reduce risk, and hedge their Bitcoin position. They can now do so in an easy and cost efficient way by using option spreads.

 

Option spreads are very versatile, while still offering limited risks. A bullish investor can use a vertical spread to benefit from Bitcoin gains, while limiting risks if the price crashes.

 

On the other hand, bearish investors can use them to short Bitcoin. Predictious is currently one of the most reliable way to do so. Since losses are limited with option spreads, investors are not exposed to counterparty risks, like they would be when trading futures on competing services.

 

Aside from Bitcoin traders, miners can also use spreads on the Bitcoin difficulty to reduce risks associated with investing in mining hardware.

 

...

 

To date, Predictious users have deposited over $300,000 in Bitcoin on the website.

 

Traders are obviously very interested in Bitcoin derivatives, but the number of businesses accepting payments in Bitcoin has surged in the past few months”, said Flavien Charlon, Founder of Pixode, “those businesses have expenses in US Dollar, or Euro, and need to hedge their Bitcoin position. The type of derivatives we are offering will be very useful to them as well”.

 

The bottom-line is that while we can see the 'use' of such a market to enabling some lower cost hedging of any wealth one might have gathered in Bitcoin, we suspect - just as in the case of many other assets - that the underlying asset will see its volatility rise as the derivative (and levered) markets becomes the tail that wags the dog.

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Sun, 12/08/2013 - 14:31 | 4226933 Martel
Martel's picture

Right now, Fiat's on like Donkey Kong.

Sun, 12/08/2013 - 14:45 | 4226975 Harlequin001
Harlequin001's picture

Here's one for the looneys..

Sun, 12/08/2013 - 14:53 | 4226997 smlbizman
smlbizman's picture

can you write a naked short on something that doesnt exisit?

Sun, 12/08/2013 - 14:55 | 4227002 Gief Gold Plox
Gief Gold Plox's picture

Short all the miners!!! It's tradition.

Sun, 12/08/2013 - 15:13 | 4227040 Bay of Pigs
Bay of Pigs's picture

Relax, fonestar has it all covered.

BTCers are in good hands...

Sun, 12/08/2013 - 15:25 | 4227060 Exponere Mendaces
Exponere Mendaces's picture

@Bay of Pigs

Can't help yourself, can you? All these articles would go away if nobody read them, gave zero votes and no pageviews.

Must be all that poor impulse control that keeps 'em coming. That, and the "quality narrative" that comes out of every barking seal-trolls mouth.

 

Sun, 12/08/2013 - 15:34 | 4227090 Occident Mortal
Occident Mortal's picture

BTC derivatives?

Hahahhahahahaha.

A new entrant at the top of the "I would rather..." list.

1). I would rather own BTC derivatives.
2). I would rather put hot needles in my eyes.
...

Sun, 12/08/2013 - 15:36 | 4227093 Stuck on Zero
Stuck on Zero's picture

I would be willing to bet you that someone will establish a margin account to play bitcoin derivatives.

 

Sun, 12/08/2013 - 15:53 | 4227125 Trimmed Hedge
Trimmed Hedge's picture

Cash advances on my credit cards so I can trade short-dated out-of-the-money options on 3x-levered Bitcoin ETFs in my margin account, BITCHEZ!!

Sun, 12/08/2013 - 16:37 | 4227224 fonestar
fonestar's picture

I've already sold and pawned everything I own for more physical Bitcoin.

Sun, 12/08/2013 - 16:55 | 4227253 geminiRX
geminiRX's picture

For your family 's sake, I hope you get help for that gambling addiction

Sun, 12/08/2013 - 17:09 | 4227289 fonestar
fonestar's picture

Nonsense.  When Bitcoin goes to seven figures I will be able to gamble much more often.

Sun, 12/08/2013 - 18:18 | 4227447 Dear Infinity
Dear Infinity's picture

As a fellow gambler, I think we should band together and bail out some of those underwater 1% luxury mansion owners... you know, like they did in '08. Never know what the payoff might be, when you save people from the clutches of a burning 10 year.

Sun, 12/08/2013 - 23:05 | 4228216 RaceToTheBottom
RaceToTheBottom's picture

Bullish trickle down!!!

Sun, 12/08/2013 - 20:29 | 4227787 eclectic syncretist
eclectic syncretist's picture

Bullshit!  If bitchcoin went tp 10 figures you'd still ride it back down to zero.

Sun, 12/08/2013 - 20:46 | 4227841 fonestar
fonestar's picture

Bitcoin will most likely be superceeded by a superior coin at some point in history.  But it's unlikely because of the massive number of nodes involved at that time that the change would be overnight.  Any feasible successor coin would need to prove itself in the wild and gain users first.

Mon, 12/09/2013 - 09:48 | 4228894 aminorex
aminorex's picture

No, bitcoin will not be superceded unless the core devs are incompetent to manage change.  Bitcoin will assimilate any technological innovation.  The network value implies that anyone wishing to bootstrap a new idea will do it as a layered protocol, thus increasing the value of the underlying bitcoin.

Sun, 12/08/2013 - 16:57 | 4227262 nmewn
nmewn's picture

lol...physical BitCoin.

At least you're getting a sense of humor.

Sun, 12/08/2013 - 17:02 | 4227271 fonestar
fonestar's picture

If you have not figured out how to hold Bitcoin, you have not figured out the Dao of virtualization.

Sun, 12/08/2013 - 17:11 | 4227295 nmewn
nmewn's picture

A lot of people at the aptly named "Sheep Marketplace" thought they had it figured out too.

Maybe you could give up your boiler room BitCoin pumping job and host some on-line courses for the good of the masses and ya know, make some real money the good old fashioned way.

By earning it ;-)

Sun, 12/08/2013 - 17:12 | 4227304 fonestar
fonestar's picture

The way I see it, any time your coins are on a machine open to the internet they are vulnerable.  Cold, offline storage with an encrypted wallet is the only way to be safe and if you trust your coins with a 3rd party then you are trusting they won't steal them.

Sun, 12/08/2013 - 17:25 | 4227328 nmewn
nmewn's picture

Well, thanks for the lesson.

So, like burying them in the ground then? ;-)

Sun, 12/08/2013 - 17:32 | 4227342 Skateboarder
Skateboarder's picture

If you bury a flash drive full of bitcoins, and BTC went to 0 or infinity, what would you find when you dug it back up?

Sun, 12/08/2013 - 18:07 | 4227417 nmewn
nmewn's picture

Its a good question and I'm not sure the BitArchaeologists have weighed in on this yet but...I'm assuming a non-working flash drive equals zero BitAccess...lol.

And in the ocean I guess it would be like BitTreasure hunting on the open sea at some point in the future, bring it up, scrape the barnacles off...and and and...uh oh ;-)

Sun, 12/08/2013 - 18:32 | 4227489 fonestar
fonestar's picture

Why would you bury a USB flash key? 

Sun, 12/08/2013 - 19:48 | 4227675 nmewn
nmewn's picture

I dunno...you'll have to ask the as yet unborn BitArchaeologist.

"Virtually" all answers to anything can be obtained on the web...just Gogggle it kid...lol.

Sun, 12/08/2013 - 20:40 | 4227821 fonestar
fonestar's picture

There are already bitarchaeologists (or forensic investigators) that have spent a good deal of time and money trying to locate the first ever website.  Yes, in the future the blockchain will also be the subject of these specialist historians.

Sun, 12/08/2013 - 18:28 | 4227471 TeamDepends
TeamDepends's picture

Tulips.  budumpshhhhh!!!

Sun, 12/08/2013 - 20:08 | 4227734 fonestar
fonestar's picture

We've already explained why Bitcoin is not in a bubble and why Bitcoins are not a fad.  Our logic is based on simple observation, history and facts.  So far we have been proven correct.  So far you have been proven incorrect.  It is my assertion that we will continue to be correct and you will continue to be incorrect.  But rather than stop and re-examine your logic you will continue in parroting stupid memes about tulips and bubbles.  Basically, you are scared that if Bitcoin collapsed you would be left with egg on your face.

Sun, 12/08/2013 - 20:26 | 4227772 TeamDepends
TeamDepends's picture

"Basically, you are scared that if Bitcoin collapsed you would be left with egg on your face."  No, that is what YOU are afraid of!!!!!  We will not respond to you again as you have clearly drunk the Kool-Aid and can not be helped, but we do wish you good luck.

Sun, 12/08/2013 - 20:37 | 4227810 fonestar
fonestar's picture

Yeah, sure.  That's why I'm on here saying that it will not collapse right?  I'm here.  Still saying the same thing.  Bitcoin is going to seven figures and thankfully most of you people will not be on that bus.

Mon, 12/09/2013 - 07:22 | 4228747 The Mist
The Mist's picture

I don't wanna hate on bitcoin, I like the idea of cryptocurrency, however something is bothering me. It appears most people investing in bitcoin do it to get  a good return, not to use it as money for trading. Most are FOMO HOMO's that wanna make a quick buck. 

The core of people believing bitcoin will still be big in a year is many times smaller. Surely bitcoin has value, but the current price is pumped up by the FOMO's.

Mon, 12/09/2013 - 09:51 | 4228898 aminorex
aminorex's picture

That's called forward discounting.  Nothing wrong with that.

Sun, 12/08/2013 - 19:23 | 4227619 Exponere Mendaces
Exponere Mendaces's picture

@nmewn

"German Silver" or a copper-nickle-zinc alloy commonly used in jewelry, is easily available and can be inscribed or etched with data that refers to the private keys. It can then be sealed into a capsule or other container, and quite safely kept nearly anywhere, as it has anti-corrosion properties and is used in marine installations. Melting temperature is in the range of 1,060 - 1,110 C (1,940 - 2,046 F).

Melting temp of pure silver is ~961 C (1,763 F), as a comparison.

Sun, 12/08/2013 - 19:44 | 4227667 Zero Point
Zero Point's picture

So.... Tally sticks? Fuck me, back to the future I guess.

Sun, 12/08/2013 - 20:04 | 4227715 Kirk2NCC1701
Kirk2NCC1701's picture

G&A is what's backing up my cold wallet. Molon Labe (Molson Labia?), BITches!

Sun, 12/08/2013 - 18:14 | 4227434 TeamDepends
TeamDepends's picture

When you can snatch the bitcoin from my virtual hand, Grasshopper....

Sun, 12/08/2013 - 18:31 | 4227485 FreeNewEnergy
FreeNewEnergy's picture

Dear Mr. fonestar,

Please look up the definition of the word "oxymoron," you moron, and then read and re-read the post to which I am responding.

When you begin to understand your own ignorance, then you may take one of the following actions, at your prerogative:

a. bang head into wall until bleeding; b. stop masturbating so often; c. begin drinking heavily, like a real man; d. all of the above.

Warmest regards from the grave,

Ghost of William Safire

Sun, 12/08/2013 - 15:51 | 4227129 SWRichmond
SWRichmond's picture
The Bitcoin Derivatives Market Has Arrived

Of course it has, because every Ponzi, when it begins collapsing, requires additional leverage to keep it going.  So the timely arrival of the derivative trade makes perfect sense.

Sun, 12/08/2013 - 16:29 | 4227207 fonestar
fonestar's picture

Even the mere mention of the word Bitcoin is enough to induce panic.

 

http://www.youtube.com/watch?v=P7wvyqVCwdQ

Sun, 12/08/2013 - 16:34 | 4227215 fonestar
fonestar's picture

I personally am not worried about a Bitcoin derivatives market because the price of an individual Bitcoin will ultimately dwarf the exchange in size and importance.

Sun, 12/08/2013 - 16:40 | 4227229 CH1
CH1's picture

And bitcoins will still be priced... in bitcoins.

Sun, 12/08/2013 - 17:40 | 4227361 TeamDepends
TeamDepends's picture

Keep smoking the bithopium boys, you'll get there!

Sun, 12/08/2013 - 20:09 | 4227738 Kirk2NCC1701
Kirk2NCC1701's picture

Bitcoin I get. It's a bet I can live with. But betting on a bet? WTF?

Is fiat so desperate to maintain VoM, that they have to create btc derivatives? No thanks.

Sun, 12/08/2013 - 22:28 | 4228117 StillSilence
StillSilence's picture

Have a feeling we may see a few more (obscure) outlet options for people to plug their dollars wealth into as things continue to get more interesting. Anything to keep them out of real assets that actually preserve wealth.

Not only that but just the idea of bitcoin will further confuse many people on the incredibly simple idea of what money is and why. As they come to realize the debt facade, there's now the crypto idea to distract them awhile longer about reality.

I like the idea of bitcoin in dollar world, but it shouldn't be needed in the first place. In a criminal world it will be far too problematic (assuming it's genuine fiat competition). In an honest world I'd doubt a great deal of use.

Sun, 12/08/2013 - 21:13 | 4227917 Tall Tom
Tall Tom's picture

I personally am not worried about a Gold derivatives market because the price of Physical Gold will ultimately dwarf the exchange' price in size and importance.

 

Damn...The arguments remain the same. Physical Bitcoin now available in PAPER.

 

The beauty of the Blockchain means anonymity. You can not ever be sure who owns what.

 

If I want to short Bitcoin all I have to do is CLAIM that I am selling them. Nobody can prove any different. If I am Goldman Sachs, JP Morgan-Chase, Citibank, Bank of America, etc. nobody will ever challenge my claim.

 

Bitcoin....THE PERFECT FRAUD.

 

I broke this story last week...in the Comments Section.

 

Why so late Tyler?

Sun, 12/08/2013 - 21:41 | 4227989 TheHound73
TheHound73's picture

-1 for ignorance.

It is trivial to prove you own Bitcoins.  Digitally sign a message with the key to your bitcoin address.  The signature is verifiable and so is your balance.  Only a person in possession of the key can sign and prove possession of those coins.  This is one of the benefits of a public blockchain.  

Mon, 12/09/2013 - 07:33 | 4228759 Tall Tom
Tall Tom's picture

What you do not understand is that the Gold Market has been manipulated by selling paper claims on non existent Gold. It is easy to prove that the Gold does not exist as we can look at the Comex and LBMA Inventories and the claims made against it.

 

It is a FRAUD to sell that which you do not have.

 

With the impossibility of proving ownership of any Bitcoin a Large Bank can sell Bitcoin that it does not have. Nobody can PROVE IT because of the BLOCKCHAIN. Thus it can be a PAPER FRAUD unlike anything that can be SEEN, ACCOUNTED.

 

A Derivatives (Futures) Market in Bitcoin provides the mechanism for committing the Perfect Fraud as NO ACCOUNTING can EVER be done. That is one of the BENEFITS of a Public Blockchain.

Mon, 12/09/2013 - 08:50 | 4228823 TheHound73
TheHound73's picture

We'll have to wait and see.  Unlike gold, it is trivial to take possession of a bitcoin.  There's really no point of buying a claim to a coin when buying the actual coin is less complicated and, most likely, costs less.  Its kinda the whole point of bitcoin.  Anybody can claim they own a large stash but if challenged it is easy to prove that ownership.  Anybody can claim they are selling large amounts of coin but it would show up on the blockchain and the buyer "should" take immediate possession.

Mon, 12/09/2013 - 09:07 | 4228830 Tall Tom
Tall Tom's picture

I foresee Manipulation and Fraud. It would be better if TPTB did not absorb it.

 

I will agree that there is really no point in buying a Future Claim to a Bitcoin when buying the actual coin is less complicated. That is a valid point.

 

Why even have a Futures Market unless it is to affectively manipulate the value?

 

Fraud is anathema to me. That a Futures Exchange is being set up just sounds way too many alarm bells.

 

I have a very bad gut feeling about this.

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