Bitcoin Investors Should Use Option Smart Contracts to Minimize Risk

One of the most common forms of derivatives are options. Bitcoin options should be a big part of cryptocurrency markets. Because bitcoin isn't as stable as assets with similar properties like gold, investors need ways to handle volatility risk.

Digital asset exchanges like Kraken and Bitfinex offer investors the ability to trade with leverage. However, this is different from options. Leverage can increase upside, but cannot protect an investor from risk.

Leveraged trades that go the wrong way can result in funds completely being wiped out. Options are an alternative to this scenario - in fact, there are strategies, called collar options, that can limit downside risk in bitcoin.

What are Collar Options?

A common way to mitigate risk in markets is using an instrument called a collar option. Collar options are used by investors for assets like stocks in traditional markets. They could also be used with digital assets like bitcoin. 

One of the most popular method of implementing a option strategy is to buy a put when prices are going down. Alternatively, investors can sell a call on an asset when it is going up. Using a collar limits risks with options; a collar is effectively a limit on upside or downside risk.

Options are essentially contracts. This is why utilizing smart contracts for reducing digital asset risk is ideal. However, there are differences in the way a smart contract would handle an option as opposed to the traditional markets.

Velocity and Collar Options

Utilizing a collar works well in traditional markets to reduce risk. In a decentralized system like Velocity, the collar option will be the first derivative instrument deployed. This is because of the decentralized benefit it has for investors.

Risks are lessened when code executes on a predetermined agreement. Option contracts are a great example of this. With smart contracts, custody of funds is held in an Ethereum wallet.

Because of the way decentralized smart contracts are constructed, Velocity’s options must be fully backed. This means without the need for a third party, instruments on Velocity are collateralized. It’s an ideal scenario for options.

Data-Driven Contracts

Decentralized smart contracts provide a level of transparency that lends itself to a clearly defined governance structure. Governance of such a system is indeed imperative, but day-to-day operations of the Velocity can run autonomously, via code.

In addition, unlike some existing markets today, blockchain-based assets can give investors more data on sentiment. All that is needed are reliable price feeds that can be fed into the system.

Digital assets can open up new ways of speculating and hedging against risk. Investors inevitably will have more data and will be able to make quick decisions regarding instruments like options. It's an exciting new frontier.