Bloomberg: Investors, Miners, Turn to Derivatives to Survive Crypto Winter

Crypto investors and miners are turning to derivatives such as options in an attempt to survive the protracted market downturn, a Bloomberg piece argues on Feb. 13.

The article presents the increasing popularity of complex trading instruments as a means of pocketing cash short term as being symptomatic of just how difficult it has become to weather this bear market — the longest in industry history.

Sam Bankman-Fried, CEO of Alameda Research, a quantitative trading firm for digital assets in San Francisco, told Bloomberg:

“Anyone sitting on a stockpile of tokens saw in the bear market of 2018 that their business is at the mercy of crypto prices. It can be crucial for those players’ survival to have some cash if digital asset prices go down.”

With a host of seasoned financial professionals entering the digital assets space, the range of sophisticated trading instruments has diversified. As an example, Bloomberg cites a representative from Singapore-based crypto trading firm QCP Capital, who disclosed that the firm had recently bought a three-month call option for a notional sum equivalent to 250 Bitcoin (BTC) (~$900,000).

The strike price of the said contract has reportedly been set to $4,200 — so that if Bitcoin is trading below this at the time of the contract’s expiry, QCP’s counterparty will pocket a $666,250 premium and keep its BTC holdings. If, conversely, by April, Bitcoin is trading above $4,200, the counterparty will be required to sell its 250 BTC at that price, forgoing any prospective gain.

Given the fact that many of these derivatives contracts are private bilateral contracts, as Bloomberg notes, official statistics are scarce. Nonetheless, the article contends that miners — squeezed by falling market prices — have become one of the main sellers of a type of derivative similar to a covered call option.

The article goes on to warn that in many cases, tech innovators being pushed to brush shoulders with ex-Wall Street staffers can be akin to “swimming with sharks,” given the latter’s wealth of experience. As one ex-Citigroup credit derivatives trader turned crypto miner noted:

“[Miners]’d better be on their guard against being duped by the clued-in derivatives houses. The trading professionals will try to take the miners for a ride by getting them to sell options too cheaply.”

Analysis piece noted this week, the initial coin offering (ICO) market took a steep tumble last year — not in terms of overall capital raised, but in terms of the number of unique projects, which has been steadily falling since Q1 2018. The article identified regulatory uncertainty, alongside the market price collapse, as major factors driving the decline.

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