A New Form of DeFi: FinNexus Cryptocurrency options

shortsegments (77)in Project HOPE • 4 years ago

FinNexus

FinNexus is a platform which allows you to trade call options on cryptocurrencies Bitcoin, Ethereum and a few others.

FinNexus is a blockchain based, decentralized finance application, which is currently on the Ethereum blockchain, Binance Smart Chain Blockchain and the Wanchain Blockchain.

If you don’t know what an option is, your in the right place. If you do know, your still in the right place, because options is a broad field, and this article concerns only what I think you need to know, to trade cryptocurrency options. I specifically keep options trading terms to a minimum, and stick to what you need to know, to understand why options are profitable and to clarify their risks.

Source

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Options

An Options is a Financial Instrument which does NOT represent ownership of a stock certificate, but instead represents control of a stock certificate, for a predetermined period of time.

More specifically, a Call Option gives you the Right but not the Obligation to buy a particular stock,for a specific price, But within a specific time period. Conversely, a Put Option gives you the right, but not the obligation to Buy within the same parameters or restrictions.

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Example

A call option on Apple Stock.
Suppose you want to invest in Apple, whose current market price is 1$ one dollar.
You can buy the stock, or buy an option.

Let’s look at buying the Apple Stock versus Buying an Apple Call Option

Choice A: Buy the Stock
You can buy 100 shares, at 1 dollar per share, for 100 dollars.

Choice B: Buy the Option
You can buy 100 options, at 1 cent per option, for 100 cents.

But the option has restrictions, price 100 dollars and time duration of option: 7 days.
(You can pay more, for more time.)

Choice A versus Choice B
In choice A, you spend 100$ to own 100 shares.
In choice B, you spend 100 cents, to control 100 shares, for 7 days.

In both cases you hope the price rises, so you can sell at a profit.

For example, you buy at 100$ and the price rises to 105$, you then sell 100 shares for 105$ and earn a profit of 5$ per share, multiplied by 100 shares: 5$ x 100 shares, equals 500$ profit.

Note that you own the shares, so you have an unlimited amount of time to wait for the price to rise, so you can make a profit.

Now if you choose Choice B, you spend 100 cents, for the option to buy 100 shares, at the price of 100$ for a limited period of time, which was one week in our example. So if the stock rose to the price of 105$, within the one week time frame, you could then buy it for 100$ and then sell it for 105$, to make the same 5$ per share profit, or $500.

But the difference is you only had 100 cents invested in the options, instead of 100 dollars invested in the stock.

So buying the option allows you to control the same number of shares, and to earn the same amount of profit, with a much smaller investment. This feature of options is called leverage.

The downside is that you have an unlimited amount of time to wait for the stock to rise, if you own the stock, but you have a limited amount of time to wait, if you own the option.

At the end of the one week time period in our example, you have to buy the stock or let your option to buy expire, which means it ends, and you don’t get your 100 cents back, which you paid for the option to buy the stock. Because options expire in a certain period of time, they time, they are called time sensitive investments or time sensitive financial instruments. But remember you don’t have to hold options until expiration. You can sell them anytime at a profit or loss to recover your invested capitol.

Now let’s think about what this means if you invest in Cryptocurrency.

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Bitcoin Call Options

Suppose you want to invest in Bitcoin, whose current market price is 1$ one dollar. The current Call Option Price is one cent.
You can buy the Bitcoin, or buy a Bitcoin option.

Let’s look at buying Bitcoin versus Buying a Bitcoin Call Option

Choice A: Buy the Bitcoin
You can buy 100 Bitcoin, at 1 dollar per share, for 100 dollars.

Choice B: Buy the Bitcoin Option
You can buy 100 bitcoin options, at 1 cent per option, for 100 cents.

But the option has restrictions, price 100 dollars and time duration of option: 7 days.
(You can pay more, for more time.)

Choice A versus Choice B
In choice A, you spend 100$ to own 100 Bitcoin.
In choice B, you spend 100 cents, to control 100 Bitcoin, for 7 days.

In both cases you hope the price rises, so you can sell at a profit.

For example, you buy at 100$ and the price rises to 105$, you then sell 100 Bitcoin for 105$ and earn a profit of 5$ per token, multiplied by 100 tokens: 5$ x 100 tokens, equals 500$ profit.

Note that you own the Bitcoin, so you have an unlimited amount of time to wait for the price to rise, so you can make a profit.

Now if you choose Choice B, you spend 100 cents, for the option to buy 100 Bitcoin, at the price of 100$ for a limited period of time, which was one week in our example. So if the Bitcoin price rose to the price of 105$, within the one week time frame, you could then buy it for 100$ and then sell it for 105$, to make the same 5$ per Bitcoin profit, or $500.

But the difference is you only had 100 cents invested in the options, instead of 100 dollars invested in the Bitcoin.

So buying the option allows you to control the same number of Bitcoin, and to earn the same amount of profit, with a much smaller investment. This feature of options is called leverage.

The downside is that you have an unlimited amount of time to wait for the Bitcoin to rise, if you own the Bitcoin, but you have a limited amount of time to wait, if you own the option.

At the end of the one week time period in our example, you have to buy the Bitcoin or let your option to buy expire, which means it ends, and you don’t get your 100 cents back, which you paid for the option to buy the Bitcoin. Because options expire in a certain period of time, they time, they are called time sensitive investments or time sensitive financial instruments. But remember you don’t have to hold options until expiration. You can sell them anytime at a profit or loss to recover your invested

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Last Words

Cryptocurrency options offer a financial advantage called leverage, where a small investment provides the same opportunity to profit, as an investment of much greater size. But they carry the risk of time sensitivity and expiration with loss of all invested capitol, if you hold them until expiration. But you can sell them at anytime, to regain some of your investment.

FinNexus is in my opinion a sign of the maturity of the cryptocurrency decentralized finance investment economy. Decentralized Finance began with Bank Replacements for Lending called Credit Debt Facilities, like the MakerDao on Ethereum and Venus on Binance Smart Chain. These were followed buy Decentralized Exchanges like Uniswap on Ethereum and PanCakeSwap on Binance Smart Chain, and CubFinance on Binance Smart Chain. A natural addition to this ecosystem is an options market similar to the Chicago Board of Options Exchange in Chicago, we now have FinNexus. Options trading isn’t for everyone, but it’s great to see this developments in the cryptocurrency ecosystem, as cryptocurrency matures and tokens like Bitcoin and Ethereum start to achieve mass adoption.