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Cryptocurrency is constantly evolving, and the push to expand blockchain-based finance into new, useful, or wealth-driving territories has proven more challenging than expected.

The Rise of Crypto Derivatives

Crypto derivatives have gained traction as more experienced traders seek sophisticated trading categories. Derivatives are a staple in traditional financial markets and are often part of compensation packages for employees joining startups or already-public companies.

However, crypto derivatives do not precisely mirror their fiat counterparts. The underlying technology and infrastructures mean they don’t always function similarly to traditional market drivers.

Options Trading in Crypto

Crypto derivatives like options provide opportunities to capitalize on the industry’s volatility and response to sociopolitical events. Traders have two main approaches to go about this.

Many crypto derivative platforms offer options trading based on inverse contracts, using cryptocurrencies like Bitcoin as both the underlying asset and collateral. This means the contract’s value is inversely related to the price of the underlying assets. If Bitcoin’s price goes up, the contract’s value drops, and vice versa.

Under this model, both profits and losses are settled in the cryptocurrency itself, exposing traders to higher volatility and more complex pricing dynamics. This can be preferable for traders looking to speculate on the asset’s price volatility through direct exposure, especially during a bear market. Traders can potentially gain higher yields by leveraging option price movements and positions in the underlying currency, particularly in highly volatile markets. Inverse contracts also allow for more advanced hedging strategies since traders can hedge options and underlying assets simultaneously.

On the downside, traders are exposed to high volatility risks given the pricing mechanics of inverse options contracts. Since option value and underlying asset prices affect returns, traders are more vulnerable to extreme volatility, especially when profits and losses are settled in non-asset-backed cryptocurrencies. With higher liquidation risks and unpredictable gains, it’s no surprise that inverse options trading isn’t exactly welcoming to newer traders.

Emergence of Stablecoin-Backed Options

Despite the complexity, platforms like Deribit have made inverse options contracts the backbone of their platform, accounting for over 90 percent of crypto derivatives trading as of last July. However, inverse contracts are not the only option available.

Recently, competitors like Thalex have been delivering alternatives to cut into Deribit’s dominance in crypto derivatives. Thalex offers stablecoin-backed options trading, using stablecoins as collateral for trades, creating a direct relationship between the contract’s value and the underlying asset’s price. Since platforms like Thalex offer both collateral and settlement in stable currencies, the volatility risk is much lower, enabling a simpler pricing model.

Thalex’s appeal to traders looking for more stable and predictable returns is evident. Since collateral is in a fiat-tied stablecoin, traders have a more robust value base that isn’t swayed so heavily by market volatility. Any profits will have a more certain value since they aren’t subjected to crypto price swings. In the long run, this model could reduce potential yield, which may not appeal to risk-hungry, profit-focused traders.

While a stablecoin-backed options trading model grants less leverage and lower yield potential in bull markets, it requires access to stable assets to participate. For newer traders just getting their feet wet in crypto derivatives, this is not necessarily a bad thing. More experienced or institutional traders uninterested in the high-risk, high-reward game of inverse options contracts now have a more reliable avenue to pursue derivatives trading.

Crypto derivatives mark an evolution in what crypto is capable of and demonstrate the industry’s ability to match or even surpass traditional financial markets. The emergence of alternatives within the space emphasizes the need to maintain competition and provide ways to broaden access to new tools. Otherwise, crypto will merely mimic traditional markets rather than improving on what they offer.

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