Many investors, even those who are active in the cryptocurrency space, are unaware that cryptocurrency options exist. But they do. And they may be a good way to access the potential of crypto while strategically hedging some of the risk. Here’s what you need to know about cryptocurrency stock options.
Cryptocurrency Options, Explained
Mechanically speaking, cryptocurrency options function just like investment options in any other market segment.
The main difference has to do with crypto’s relative lack of regulation. At this point, many leading financial institutions still see cryptocurrency as new, unproven, or unstable. As a result, crypto trading—including options—remains largely outside of the financial and investment mainstream.
Despite this, cryptocurrency options do exist. And they’re giving investors a new, potentially helpful way to get into the crypto space.
Benefits of Options Trading
Cryptocurrency options give investors the right to buy or sell a currency at a pre-set price within a specified period of time. Importantly, cryptocurrency options don’t require you to buy or sell the currency. Instead, they give you the right to buy or sell before the deadline if you want to.
In traditional financial arenas, people use options as a way to see potentially significant gains while limiting some of the risk. Basically, you’re hoping that the predetermined price of the asset will rise or fall before the deadline in such a way that will allow you to quickly turn a profit. And the whole time, the fact that you’re locked in at a pre-set price serves to limit your risk.
How It Works
Cryptocurrency options are different from regular crypto trading. In particular, when you’re trading cryptocurrencies, you’re basically buying and selling coins or tokens whenever you see fit. Obviously, you’re hoping to sell them at a higher price than you paid for them.
But with options, you’re operating within a specified time frame. And the price at which you’re buying or selling the currency is already determined.
Depending on the structure of your investment, you’re hoping to see the market value of your currency rise or fall relative to your predetermined price. And you need it to happen before your deadline.
Key Terms and Concepts
Now that you know the basics, let’s break it all down a bit further. Here are the most important terms and concepts you need to know.
A call option gives you the right to buy a cryptocurrency at a predetermined price before a set deadline.
With a call option, investors are hoping that the currency will rise in value before the deadline. If that happens, they can buy the currency at the predetermined price—which will now be lower than the market value—and then immediately sell at the higher market price that will be listed on a cryptocurrency exchange.
In contrast to a call option, a put option gives you the right to sell a cryptocurrency at a set price before a given deadline.
In this structure, an investor is hoping that the currency’s value will fall before the deadline hits. If it does, they will be able to sell their currency at a price far higher than the market value, giving them an immediate profit.
The Future of Cryptocurrency Options
Importantly, there are already a few exchanges out there that offer cryptocurrency options. But it seems likely that we’re still in the early days of crypto options.
In fact, as cryptocurrency continues picking up legitimacy from mainstream and influential financial institutions like Goldman Sachs, which is looking to create crypto securities, expect to see crypto options become more regularly available.