Cryptocurrencies have emerged as a credible asset class recognized by investment banks, hedge funds, and other asset managers. Trading crypto options is no longer an ultra-niche sector. Smart traders are using options to hedge their bets, magnify the rewards, and diversify their risks in a volatile crypto market.
According to Trade Alert, a staggering 7.5 billion options (for stocks, crypto, and other assets) were traded in the year 2020. The momentum continues in 2021. As more and more individuals and institutions embrace crypto, they are presented with the opportunity of exploring crypto options.
The road ahead: Decentralized options trading platforms
Options are derivative contracts that give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) on or before a specific date. A “call” option is a right to buy, while a “put” option represents the right to sell.
Today centralized exchanges and traditional platforms handle most of the crypto options trading demand by retail traders. But DeFi protocols are coming up with innovative solutions to overcome the hurdles you face on traditional platforms.
While DeFi options trading platforms are not as big as the traditional ones yet, they are constantly bringing more crypto assets to the options market and simplifying the complicated strategies for traders.
For instance, Premia Finance is a year-old DeFi protocol that lets users trade options for a number of native Ethereum and Binance Smart Chain tokens. It also has a secondary marketplace to facilitate peer-to-peer trades, as a decentralized platform should. You can also stake Premia tokens to earn a share of the platform fees.
But Why Might Users Switch?
Let’s take a deeper view to understand why decentralized options platforms could be the future.
Robinhood, which generates most of its revenue from options trading, is preparing to go public at a valuation of above $32 billion. The company said in its regulatory filing that options trading accounted for a staggering 46% of its 2020 revenue came from options trading. That’s $440 million out of $958 million.
Its options trading revenue skyrocketed 298% from 2019 to 2020. On top of that, crypto trading made up 17% of Robinhood’s revenue during the January-March quarter of 2021. The company revealed that Dogecoin trades alone accounted for 34% of its revenue.
It all sounds good on the surface, until you dig a little deeper. Robinhood doesn’t charge its users a trading fee. Then how does it make money? By selling your orders data to high-speed traders. No wonder Inc. magazine has called it the “Facebook of investing.”
Robinhood is not alone because most other traditional trading platforms do exactly that. Selling your trading data is a lucrative income source for them.
Robinhood has also been accused of luring newbie traders into engaging in complex and high-risk trading strategies without sufficient knowledge or guidance.
Consequences? A 20-year-old committed suicide after he saw a negative balance of $730,000 in his trading account. In another case, Robinhood paid $70 million in fines and restitutions to harmed customers after the Financial Industrial Regulatory Authority (FINRA) accused it of “systemic supervisory failures” and giving its customers “false or misleading information.”
But what alarmed traders is that a platform that was supposed to be an advocate for the “little guy” started singing a different tune after receiving a call from some Wall Street billionaire. At the whim of the Wall Street suits who were being beaten by retail traders, Robinhood stopped its users from buying the GameStop shares.
When traditional platforms have made selling users’ financial data a primary source of their revenue, when they are aggressively luring noobs into high-risk options trading strategies, when they have stopped giving a damn about users’ trust, it’s easy to see why decentralized options trading platforms governed by the community are superior to the Facebooks of investing.
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