The world's economy is quite different from it was a year ago, despite ongoing pandemic assistance and vaccination efforts. The shift away from traditional financial institutions has been accelerated by the new financial landscape and ongoing uncertainty.
The world of cryptocurrency is now a major player in the economic engine that is trying to accelerate from a halt. Major asset managers, investment banks, and hedge funds have recognized cryptocurrency as an asset class. The financial world continues to be captivated by the rapid adoption of crypto. This is also opening up new opportunities for investors to explore crypto options.
What are the options?
Options are financial contracts that permit investors to purchase or sell the underlying asset at a fixed price at a later date. Investors can make directional bets about the asset's price movements. If the asset's value is expected to increase, investors can buy call options. They will earn a profit if it falls below the strike price. They can also purchase put options if they think the asset will decrease in value.
Investors can exercise their right to purchase or sell the underlying assets from the issuer if these conditions are met. They can also trade their options with others to make a profit.
The truth about options
Options have many advantages that make them more appealing to investors in volatile markets. Investors can gain access to larger positions for a fraction of their cost by using options. Consider buying 100 shares of stock for $50. An investor must have at least $5,000 capital to get into this position. The cost of options can be greatly reduced. An investor can get the same exposure to stock or cryptocurrency for less than the price of buying options, such as a option with a $150 premium.
Options can be a powerful tool for investors in helping them capitalize on volatility in the markets. They allow investors to participate in these markets while freeing capital. This allows them to diversify their strategies and take on more positions.
Optional investments allow investors to be exposed to market volatility. Options tend to be more expensive in volatile markets because the price of the option is directly related to market volatility. An investor who holds a long position on an option contract can also benefit from market volatility.
Options are best used as risk management tools. To hedge their portfolios against market volatility, investors can purchase put options (or bet against it) to buy put options. This works in the same way as buying insurance to protect your portfolio from market volatility and down-moves.
Institutional frenzy over options and crypto
Institutional interest in cryptocurrency markets continues to rise. Options allow strategic investors to take advantage of the volatility in crypto markets and make high-profitable investments while avoiding higher-risk investments. Investors need to be able diversify and hedge their positions in order to take advantage of the volatility inherent to crypto markets.
Options markets offer investors the chance to invest in the market, play the field and make strategic investments. This has maintained activity even in a bear market.
Institutions are not the only ones who can make a difference
Retail investors are realizing the power of options for individuals, even during times of economic uncertainty. Trade Alert reports that 2020 was an unprecedented year in terms of volume trading, with 7.47 million contracts traded. This trend was confirmed into early 2021.
Surprisingly, the bulk of the volume increase was due to retail investors. Barron's reported that options brokers like Schwab have experienced a 116% rise in the number of options being traded. The position size of less than 10 options makes it probable that 60% of all options traded are being done by retail investors. The number of single-contract trades has increased by a third in the same period.
Major names like Goldman Sachs, after witnessing huge institutional demand, have announced that they will be expanding their crypto presence and offering options trading in Ether. These products will be available to retail customers as well. They are expected to lower the leverage and provide investors with an easy way to get started.
Today's centralized exchanges have better capabilities to meet retail demand. They are not subject to the network congestion that Ethereum causes, which allows them to execute trades instantly with lower fees.
However, this doesn't exclude the potential for innovation that comes with decentralized finance's accelerated pace. DeFi has already disrupted traditional financial industries and is now looking to expand the options available. As the ecosystem evolves, decentralized exchanges will be a major part of connecting retail investors with options.
The economic impact of the global pandemic is expected will last until 2025. This will ensure that cryptocurrency markets remain volatile. DeFi applications, centralized exchanges and other organizations are working diligently to bring more cryptocurrencies to options markets and simplify complex trading strategies for investors.