Bitcoin options trading is the latest trending topic amongst many crypto investors and traders. Many have seen the viability of this derivative and are actively engaging in it. In this article, we will dive in to make you understand the importance and another way to exploit the crypto market, making profits on the way.
The cryptocurrency market is relatively new compared to the rest of the traditional financial market. However, with the speed at which the market is evolving and creating a wave, many are attracted to it. In addition, trading Bitcoin options derivatives is equally new and has caught up like wildfire in cryptocurrency communities and within traditional stock and forex traders.
Cryptomarket is more than a decade old and one of the most volatile markets. Due to inherent volatility, it presents several opportunities for crypto users to exploit within a day. It is also becoming popular amongst traditional investors and traders.
Many believe that investing in crypto is a waste of time, money, and energy. However, they cannot deny that it is one of the most liquid and highly volatile markets today.
When Bitcoin was introduced, many joked about it being a gimmick and ignored it. At that time, during its inception, it was trending in mere cents. However, a few years down the line, the publicity of this cryptocurrency was gathering pace amongst those who viewed the future to be different from what the rest of the crowd thought. Those who believed in this crypto started to imagine the potential that could be exploited to make the world a safer place.
Bitcoin inspired many developers to create their alt-coin or cryptocurrencies. Although it took some time for Bitcoin to reach its all-time high of $67,000, many who did not believe in it could hardly imagine their foolishness and ignorance of owning it when it was well within their reach. They are gripped with FOMO-Fear of Missing Out.
Those who had invested in Bitcoin saw the potential when most of the markets came to a standstill; the cryptocurrency market continued to surge. At the time of writing this article, the last daily turnover of the cryptocurrency market is around $203.54 Billion.
Although the price trend of Bitcoin is trending sideways, prices still fluctuate between $19,000 and $21,000 after reaching an all-time high of $67,000; there are many cryptos enthusiastic and experts that the price of this cryptocurrency is bound to increase in the near future.
So now we have two groups of people, one who does not believe in Bitcoin but wishes to exploit its inherent volatility, and the others who are crypto traders who missed the golden opportunity to own Bitcoin as a whole coin when it was well within their reach.
Bitcoin options trading is the latest financial tool that can satisfy both sets of people. Recently Wall Street has allowed trading of Bitcoin options as one of their financial products open for the general public to enter and exploit to generate substantial profits.
Before we jump into trading Bitcoin options, you need to know a few necessary things.
What are Bitcoin Options?
Bitcoin options are contracts between a buyer and a seller. This contract will expire on a predetermined date, a future date called the “Expiry Date.” The date on which the contract ends is called the “Expiry date.” A “Strike Price” is an agreed-upon price. A “Spot Price” is the price of the underlying asset at the time of expiration of the contract. To enter a contract, the buyer must pay a “Margin Fee.”
The buyer is not obligated to buy the contract at the end of the expiration date.
The buyer can hold multiple contracts; there is no limit for the buyer entering into a contract, and the only restricting factor is the amount of money the buyer may possess.
How Bitcoin do options work?
Two scenarios occur at the end of the expiry date; either the spot price will surge above the strike price or below it.
If the spot price coincides with the speculated price trend of the buyer, then the buyer will make a profit. Therefore, the price difference between the spot price and the strike price is the profit margin the buyer makes. In addition to these price differences, the margin fee is also deducted.
However, if the spot price does not align with the price trend speculated by the buyer, then the buyer is under no obligation to buy the contract and can exit the contract by paying off margin money.
Types of Bitcoin Options.
While Bitcoin options trading, there are two types of options: American and European. The only difference between the two is that American-style options can be exercised any time before the contract expires, while European-style options can be exercised only on the contract’s expiration.
Advantages and challenges between Bitcoin and trading Bitcoin options.
The major advantage is that when you own a Bitcoin, you know that price is sure to appreciate, and you can make a substantial amount of money in the future. Thus, if the price trend in the immediate future is below what you expect, it makes no difference.
The major challenge for owning Bitcoin is that you are at constant risk of cyber threats. You also have to keep your wallet address and digital, physical storage wallet safe and secure as if you were to misplace them, the chances of you recovering them is quite a headache.
The major advantage of trading Bitcoin options is that you do not have to worry about storing your wallet address or crypto exchange which is at the mercy of frequent cyber threats. Instead, you enter into a contract and only need to monitor the price.
Major challenges are the chances of you running the risk of loss. On that fateful day, if the spot price of Bitcoin is poor, then you can make a loss. However, the loss can be minimized by exiting the contract by paying off the margin money.
Bitcoin options trading is better for those who wish to be exposed to the risk of Bitcoin volatility to make a profit while simultaneously refraining from owning it. You can also leverage your profit by entering into multiple contracts.
Although there are chances of amassing huge profits, you should only risk the funds you are ready to let go of.