Published: April 16th, 2020
Crypto exchange Binance has unveiled a new investment service for mobile users, enabling them to trade in bitcoin options using the company’s smartphone app.
Confirming rumours that began circulating earlier in April, a company announcement said the new Binance Options service would allow traders to execute bitcoin options contracts at any time before their expiry date.
Compared to traditional options, Binance said the new service would give traders a shorter time frame to work with, ranging from 10 minutes to 1 day. There will also be just one strike price, which will mirror the contract price on Binance Futures at the time a trader exercises their rights.
The move puts the exchange in direct competition with options trading market leaders Deribit and the Chicago Mercantile Exchange (CME), but reactions so far have been mixed. While Binance’s entry could drive more interest in Bitcoin options, some believe the market will eventually acclimate around the current leader.
Analysts at crypto options trading firm QCP Capital told Bloomberg that the ‘nature of exchange markets means capital will naturally trickle down to the dominant exchange.’
But a spokesperson at Skew said the derivatives analytics firm expects Deribit's market share will go down over time as new competitors enter the market, ‘similar to what’s happened with BitMEX on the futures side.’
Binance currently offers a derivatives trading service called Binance Futures, that allows users to place highly-leveraged cryptocurrency trades. With the launch of Binance Options, traders will have access to additional mechanisms for managing risk.
Binance said in a press release that users would be allowed to purchase bitcoin call and put options at market prices, with expiry between ten minutes and one day. The company said the shorter than usual timescales will provide additional liquidity, reduced spread, and enable lower premiums.
‘Traders and miners can effectively buy insurance on their positions,’ they added, while speculators can also take advantage of market movements.
Only Bitcoin options are available on the platform currently. More features and products are set to be launched soon.
Bitcoin options are relatively new to the derivatives and crypto markets. They are typically used as a hedge, but they are sometimes used for speculation. There are two types of contracts – call options and put options.
Call options are contracts that specify an underlying asset (Bitcoin), the ‘strike price’ that triggers the transaction, and the contract expiration date. Traders use call options when they expect the price of the underlying asset to rise.
Put options are used when the price is expected to drop. Traders use them to speculate on the decline and sell them when the contract's strike price is reached.
Binance has chosen an interesting time to launch its service. Aside from the pandemic turmoil currently roiling all financial markets, As recently as March, interest in Bitcoin options seemed to be drying up.
Earlier this week the Chicago Mercantile Exchange (CME) recorded just three bitcoin options contracts on Tuesday worth ca. USD 80,000 – the lowest daily volume for bitcoin options ever recorded by the exchange. A previous low of ca. $125,000 was recorded at the end of January.
When the CME’s bitcoin options trading product launched in mid-January, it recorded $2.2 million trades on day one, beating the rival Bakkt platform, which had cumulatively seen trades totalling ca. $1 million since opening its doors on 9th December.
Volumes continued to spike on CME hitting for a few days after launch, with a record high of $5.4 million on 17th January, but then began to decline. Bakkt has seen literally no bitcoin options trading since the end of February.
Given bitcoin’s price volatility this year, the lack of take-up on both CME and Bakkt is unexpected.
Data from Skew shows that the option market's outlook for potential bitcoin moves rose from 3.5 percent to a record high of 6.8 percent in the week leading up to 17th March.
More volatility typically drives demand for hedging instruments like options. However, the opposite has happened to bitcoin – on U.S. regulated exchanges at least – with volumes have dropping sharply even as volatility spiked.
Institutional traders may be to blame for the decline in options trading volume, with many seen to be treating bitcoin as a source of liquidity during the recent massive stock market sell-off.
Analysts at digital asset management firm Wave Financial said institutional investors have recently been offloading risk assets like bitcoin. The CME’s traditional investment managers wanted bitcoin exposure without a priority of utilisation or ownership.
The drop in bitcoin options volume occurred in part because their customers were in a flight to cash. Open positions on the CME have also been falling significantly from record highs recorded at the end of February.
Options trading volume on Deribit, meanwhile, fell to $52 million this week, the lowest level recorded since the beginning of March.
Derabit initially benefitted this year from risk-aversion in traditional markets. Its volumes hit a record high of $248 million when bitcoin’s price crashed on 12th March, though the downside moves may have been artificially inflated by forced liquidations happening on the BitMEX exchange.
Interest in bitcoin futures listed on CME has continued to lag. Open interest has dropped to a two-month low of $171 million from a February high of $338 million. Overall trading volumes have fallen from a record high $1.1 billion in February to a three-month low of $88 million.
The sharp decline in volumes and open interest suggests that traders have been closing their hedge positions, while at the same time liquidating positions in the spot and the futures markets.