A bitcoin option is a financial instrument that acquires value from an underlying asset. It is an agreement that enables one to buy Bitcoin at a specific price and on a certain date.
A trader can pay a premium to acquire an option, which is generally cheaper than purchasing cryptocurrency. In addition, bitcoin options enable a trader to take a conceptual position on the future direction of the market price, be it increasing or decreasing. Bitcoin options trading has been introduced lately, but it has gained a lot of exposure in investors’ minds.
When a person trades Bitcoin, he is speculating on whether the market that he chose is going to rise or fall in value without even holding on to a digital asset. Therefore, trading in bitcoin options also helps to gain risk management skills, which are the most important thing to recover when a trader has faced an impeccable loss.
There is two option trading systems in this market:
- Call option: A call option is an agreement that gives an investor the right to buy an asset at a specific price. For example, traders often buy call options, expecting that the market price will rise.
Let’s say the price of bitcoin is $20,000 and a trader buys a call option for one bitcoin at a strike price of $25,000, roughly calculating the premium as $400, and it expires at the end of the month. Imagine the price of Bitcoin being swept to $27,000 by exercising a call option. A trader would buy at a discount of $1,600, which is Bitcoin’s price, the strike price, – the trader’s option premium. However, the trader cannot make a profit of $1,600 unless he sells Bitcoin at $27,000. In simple words, if the price of Bitcoin did not reach the strike price of $25,000, a trader would only lose his $400 premium rather than investing in future call option.
- Put option: – a put option is an agreement that gives an investor the right to sell an asset at a specific price within a given time. In this case, traders often buy put options, expecting the market price to fall. For example, if a trader had expected the Bitcoin price to drop to mid-$15,000 and they had bought a put option at a strike price of $20,000, This exercise would help a trader to sell off the Bitcoin at a price of $20,000 and minimize the cost of the premium.
Options trading is mainly how a trader buys and sells an asset in an open market. Since there is no pact vehicle buying and selling in this market, this type of trade reduces chances of risks automatically. Apart from this, options trading also provides strategies that include that a trader can pay someone to lay their risk, or a trader can get paid to lay somebody else’s risk. And most important, Bitcoin options trading allows a trader to speculate on the future prices of an asset while constraining their potential losses.
Benefits of Bitcoin options trading –
- Volatility – However, the Bitcoin options market is relatively new; it has experienced crucial volatility due to large amounts of short-term predictive interests. The volatility of this cryptocurrency is part of what makes the market so exciting. While curating fast intraday price movements can provide a range of opportunities to traders for going long and short but also come with increased risk hand in hand.
- Liquidity revamped – Liquidity measures how quickly and easily a Bitcoin or any other cryptocurrency can be converted into cash without influencing the market price. Liquidity in the market is essential because it brings better pricing, faster transaction times, and increased precision for technical analysis. Liquidity has been considered so much because the transactions that occur during trading spread across various exchanges, which means approximately any small trade can have a significant impact on the fluctuation of the market prices.
- Considerable market hours – The Bitcoin options market is usually available for trading 24 hours a day and seven days a week because it is not managed or interfered with by the central bank. Bitcoin or other cryptocurrency transactions occur between two individuals on a market exchange in any part of the world. However, there may be a once-in-a-while server breakdown for market updates.
- More straightforward account opening process – Bitcoin options trading is carried out by buying and selling an asset through an exchange; for that, a trader requires to make an exchange account to keep his digital currency in his digital wallet account. As the cryptocurrency market is exposed and an underlying market, a trader is provided with a private key that helps him to secure his account from hackers. It takes a minimum of 5 minutes to open an account by filling out a simple application form and online verification process.
If there are benefits to things, then there are some risks that come simultaneously. Stated below are some of the risks that are essential to overcome by an investor or trader.
Risks of Bitcoin Options Trading –
- Excessive losses – Usually, losses are sustained by both the buyers and sellers, because of the volatility of trading options and the fluctuation value of the underlying assets, especially in leverage agreements.
- Abstract analysis – Bitcoin options trading is mainly hooked towards speculation. Due to this unpredictable analysis, one wrong hypothesis could result in a massive loss for an investor.
- Fraudulent accounts – As the market is exposed and is underlying in the market, the scammers have access to an investor’s portfolio and trading history. Although a trader can protect his account with a private key provided to secure their account, if the trader loses his private key, then anyone, including the scammer, can have access to his account and can withdraw all the earnings of a trader.
Conclusion:
Trading in Bitcoin options can sometimes be risky, complex, and confusing to understand. But eventually, when a trader starts his journey in trading options, they encounter multiple factors that can lead to unexpected changes in the value of an agreement; even if the price moves in a direction that is favorable to the deal, traders can still face losses due to changes in time break down and implied volatility. If you’re a newbie willing to trade in Bitcoin Options then Blockchain Tradein may be the right pick for you.
