LedgerX Bets on BTC Options

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LedgerX has quietly listed bitcoin financial contracts: swap and options. After touting a trading volume of $1 million, LedgerX now offers hedge funds, family offices, sovereign wealth funds, and others a way to play bitcoin. Of the two instruments, the bitcoin options may be the most popular among institutional investors.

As the name implies, day ahead swaps last only one day. The swap buyer agrees to pay today for tomorrow’s delivery of bitcoin by the swap seller. If the price of bitcoin increases after one day, then money is made by the swap buyer; money is lost if the prices decrease. While called day ahead swaps, these financial contracts act more like commodity futures.

With a futures contract, the seller agrees to deliver goods at a future date and the buyer promises to pay an agreed upon price. In addition, swap agreement usually required a swap of payments between the buyer and seller. With the day ahead swaps, the buyer makes a payment, but seller’s obligation is satisfied with the physical delivery of bitcoin. Cash-settled bitcoin futures are planned to be listed by the Chicago Board of Exchange.

Bitcoin options maybe more important for investors. Options provide the buyer with the right, but not the obligation, to either purchase or sell an asset from the option seller. With equity options, the option buyer has the right to sell (put) or buy (call) stock from the option seller at specified price during an exercise period. For the right to put or call an asset, the option buyer pays the option seller a premium.

Option allows investors to bet on price swings. For example, you think Apple price will not rise this year, so you sell and collect a premium for a call option. The call option give the holder the right to purchase Apple stock from you at $160 per share. If Apple’s price increase to say $200, the option is exercised, but if not then the seller gets to keep the option premium. If you think Apple will go up, then you would sell a put option.

So replace equity with bitcoin, and you can see how options can be used by institutional funds to trade crypto-prices.