Bitcoin options trading
In This Article
- What is Bitcoin Options Trading?
- Pros and cons of Bitcoin
- What time does the Bitcoin option expire?
- How to trade bitcoin options using foreign exchange?
- Features and benefits of the Bitcoin options
- How to buy and sell Bitcoin
- How to Invest in Bitcoin Futures?
- Follow these five tips to ensure that you carry out a safe trade
- How does bitcoin mining work?
- Is Bitcoin mining profitable?
- Benefits and risks of trading forex with bitcoin
- How is Premium calculated in Bitcoin options trading?
What is Bitcoin Options Trading?
Options are financial derivatives where you have the option of buying or selling Bitcoin somewhere in the future. You are not obliged to either buy or sell if the desired outcome is not matching or not according to your prediction.
Suppose you enter a Bitcoin Options Trading, having a strike price of $1500, and the contract premium is $100, and you have entered into a three-month contract. There are two outcomes.
- After three months, the valuation of Bitcoin has increased to $2000, then you have made a profit of $500, but in reality, you have made $400 as you have paid a premium of $100. If you brought three contracts, then a profit of $1200 as you paid $300 as the premium cost.
- Supposedly after three months, the cost of Bitcoin falls to $1000. So there is no profit you can book. In this case, you have the right to exercise not to sell.
Pros and cons of Bitcoin
Pros of Trading Bitcoin
- Ease of Transaction: Bitcoin as a cryptocurrency is easily accessible and can be transferred globally. Moreover, it takes little or no transaction fees compared to bank transfers.
- User Anonymity and Transparency: Whenever any transaction takes place, the transaction details are in the form of numerical codes. Thus the trade carried out is transparent. Even though the trade carried out in numerical code is publicly displayed, it is still safe as it uses encryption technology. Another feature is an e-wallet in which the cryptos can be kept safely. Even if the wallet is kept for public viewing, you can simply change the address to the e-wallet.
- Independence From Central Authority: Since cryptocurrency is not regulated, there is no way the government can know the actual value of the assets you own in crypto. Nobody, even the government, can ask you to reveal your crypto holdings. This is the biggest advantage to the Bitcoin traders who like to deal without any intervention.
- Potential for High Returns: The Crypto market is very volatile. We know how Bitcoin was trading in mere cents in 2009, and in April 2021, the same coin jumped to $64,000, hitting an all-time high. It gives out lots of opportunities and lucrative returns for the traders who know how to time their trade correctly.
Cons of Bitcoin Trading
- Volatility: The volatility of Bitcoin is pretty high. As one cannot predict the price of a Bitcoin, many have tried, and have failed terribly. A total 21 million of Bitcoin can ever be in circulation. This scarcity is what makes it a rare asset. Thus justifying its volatile nature. Any comments or opinions expressed by celebs on crypto can also affect the price of Bitcoin. Hackers sometimes target exchanges which in return threaten the investor’s funds.
- Unregulated Market: The prospect of the crypto market being unregulated is the most attractive feature. But it is a double-edged sword. Since there is no insurance against any loss or incident. If the creators or the developers of particular crypto vanish out of the market, the investment made for that specific crypto would be lost permanently.
- Irreversible Loss: Since the crypto market is not regulated, if the crypto is sent to the wrong address with the wrong amount, it can be a permanent loss as the crypto uses blockchain technology, making the transaction activity difficult to trace. Once the transaction gets recorded in a block, there is no way to change it. If the investor keeps their cryptos in an e-wallet for security reasons, and if they forget the private key then there is no way to recover those cryptos. Another disadvantage is that if the hard drive of the e-wallet gets corrupted, the cryptos in that ewallet are lost for good.
- Limited use: Even though crypto is in high demand, only a few enterprises like Microsoft and some subway franchises accept crypto as a mode of payment. Thus this limited use of crypto can be frustrating at times.
What time does the Bitcoin option expire?
Traders must decide on the duration of holding and the price of the crypto while entering the market. This is called a contract. A contract has two components: “strike price,” the specific price at which the investor or the user enters the market, and the duration and time till the contract is valid. At the end of the duration, the contract expires.
Contracts can expire in one-day, two-day, weekly, bi-weekly, monthly, quarterly, and bi-quarterly time frames.
For example, if you enter into a contract of $100 for six months, the strike price would be $100, and the duration is six months. At the end of six months, the contract expires.
- In America, the contract can be exercised by the buyer at any time before the expiry date.
- In Europe, the contract can only be exercised when the date expires.
- The contract expires on the last Friday of the contract month.
How to trade bitcoin options using foreign exchange?
Generally, in two ways, a trader can use Bitcoin Options Trading to enter the forex market:
- Trading Bitcoin as a part of a currency pair, and
- Using Bitcoin to deposit the funds to a trading account.
Like conventional forex currency pairs, Bitcoin can be traded like any other fiat currency pair, i.e. Bitcoin can be paired with a dollar like BTC/USD. Deals for buying and selling and stop-loss and take-profit orders are made in the same way.
However, Bitcoin is quite different from traditional currencies since it has intrinsic features and has been in the market for a significantly short time.
Unlike fiat currencies which are subjected to uncertain supply originating from the central bank, Bitcoins are created by mining operations. Therefore, they have a controlled supply that cannot be altered, avoiding the possibility of a sudden increase or decrease in the valuation of Bitcoin.
Bitcoin’s total supply is limited to 21 million. Its value is subject to the fundamentals of the crypto market; thus, the valuation is not dependent on a specific country, economy, or even the central bank. Unlike other currencies dependent on central banks, any shift in the monetary policy can affect these currencies.
Even though many brokers develop new contracts allowing investors to purchase Bitcoin on margin, such contracts are currently limited as Bitcoin Trading Options is surrounded by a small number of derivatives and other paper contracts. On the other hand, currency traders are at an advantage due to the availability of many over-the-counter (OTC) contracts, thus increasing their leverage by employing a broad list of contracts.
Finally, the most distinguishable factor is liquidity. Bitcoin has a mere market cap of $650 billion, while that of forex is $6 trillion. Thus the forex market is more liquid than the market for Bitcoin. Moreover, crypto is also subjected to high volatility.
Features and benefits of the Bitcoin options
There is no need for you to engage with options if you think the price will continue to rise after buying Bitcoin. However, Bitcoin Trading Options have various benefits for traders.
Small risks with large profits.
Options allow you to speculate on the future value of Bitcoin with minimum capital required. Thus with a small amount of investments, you have the potential to make a huge profit.
For example, with a premium of 10%, you can buy Bitcoin options, effectively, you are risking 10 times the amount you have invested.
The potential for profits is virtually limitless:
There is virtually no limit to how much profit one can make. For example, suppose you buy at a strike price of $10,000.
So you make a profit of $5,000 if the option closes at $5,000, and if it closes at $20,000, you make a profit of $10,000. Put options profits, on the other hand, are limited because Bitcoin’s maximum price is $0.
Holding for an extended period and selling Bitcoin without paying hefty fees:
Shorting Bitcoin means that you will sell off the digital currency as you think its price will go down. You could have made good money if you had entered the crypto market during the crypto-craze in 2017.
Even so, retail clients can only sell Bitcoin through CFDs. Moreover, since CFDs are leveraged financial products, one has to pay overnight fees, which means you need to pay for each day to keep your position open.
CFDs in crypto are very likely to eat through your potential gains faster, thus making your long-term short trades unprofitable.
This is where the Bitcoin “put” option comes into play. All you need to do to access the market is pay the Premium. Thus you can short Bitcoin without the worry of overnight financing fees. So effectively, it reduces your trading fees while enabling you to make a huge profit.
Great way to reduce your risks:
The seasoned traders use hedging to reduce the risk. For example, suppose the cryptocurrency market is due for a correction. You hold a large amount of Bitcoin in your portfolio, enjoying great returns. Instead of selling off your Bitcoin, you want to make money by taking advantage of the market.
Rather than selling your Bitcoin, you decide to exercise the put option and make most of it. Thus at a reduced price (since you are required to pay only for the premium and not the entire price) you have the opportunity to make more money.
How to buy and sell Bitcoin
Once you have set up your account with the crypto exchange and have brought cryptos as per your needs, the process of buying and selling of Bitcoin will depend upon the exchange you have chosen.
Some exchanges simply have a “buy” and “sell” button specifying how much currency you wish to buy or sell-off. Others need you to place an order similar to what would be placed on a traditional stock exchange. However, there are three types of orders that most crypto exchanges allow you to tap into for buying and selling Bitcoin.
- Market Order: An order to purchase a specific proportion of Bitcoin at today’s market price. It is a relatively short process that takes only a few seconds to complete.
- Stop Order: Sets a price for you to buy or sell Bitcoin. This order can be used to sell Bitcoin at a higher price before it plunges, but it takes longer to execute than a market order.
- Limit Order: Advises the exchange to buy or sell Bitcoin at or above a specified price. These can take longer to complete than stop orders because they are visible to the market. It gives you an excellent time to buy Bitcoin once the price has dropped slightly.
Some exchanges still have a few more options to offer, like most order variety, stop-loss, and take-profit orders, which are advanced options. Therefore, though the above mentioned orders are basic, it is advisable to start with the basics and then jump into more options offered by your exchange, as per your needs.
As cryptocurrencies are evolving and being accepted by the masses, the crypto exchanges, too, have evolved. One can even say that they are at par with the traditional stock exchange. Some even exhibit recurring investment options that allow you to invest daily, weekly, or monthly.
It is advisable to stick to a conventional exchange to trade and buy Bitcoin against other P2P cryptocurrency exchanges. Of course, the person you are making a P2P exchange with is known to you.
How to Invest in Bitcoin Futures?
Before you start, you need to sign up with Blockchain Tradein and confirm that you wish to initiate the trade. For bitcoin futures trading (/BTC) S.M., CME Group (CME) and CME Group (CME) micro bitcoin futures trading (/MBT) S.M., you must have specific qualifications and permissions on your account, including
- Non-Retirement Account and
- Futures trading approval
Before you trade any futures contracts, including bitcoin futures, you must have all of your funds cleared in your account. Deposits made through ACH and Express Funding can take up to four business days, while wire transfer gets cleared on the same business day.
While futures products still come with their own set of risks, they offer a more regulated and stable way to gain exposure to bitcoin as a commodity. However, considering your experience, ambitions, financial resources, and other relevant circumstances, you should carefully assess whether investing in bitcoin futures is suitable.
Follow these five tips to ensure that you carry out a safe trade:
Developing your trading personality:
Searching for an effective methodology will ensure that you maximize your profits while lowering the risks. Once you hone the strategy, you just have to keep on replicating it. However, this methodology must be personalized, reflecting your investment plans, risk tolerance, lifestyle, and long-term goals.
If certain things don’t work for you, then adjust your plan, and be flexible.
Develop a trading plan:
When you have a plan to approach the crypto market, things become effortless for you. You are less likely to make mistakes and are not easily persuaded by any distractions. While planning, here are a few things that must be considered, such as how you would enter the market and exit it, the entry and exit indicators, position-sizing, and stop-loss placements.
There are numerous advantages of having a trading plan/strategy. It includes reduced stress or anxiety related to trading and assistance in missing out on fewer trade opportunities. However, traders must become more mindful of their trading practices to make highly targeted advancements and treat trading seriously.
Proper management of risk:
This is one of the most important aspects while trading. You must be prepared for what you deem acceptable or unacceptable to lose in a trade.
Each dollar should be treated 100 times its original amount when trading futures. For example, suppose your account is worth $1,000, then losing $10 should be considered extremely risky.
You should approach each trade with a clear strategy if you want to keep a long-term view. Your account will build adequately if you keep on winning in a small dose over time. Managing risk can help you protect your investment. Keep a view of realistic expectations while avoiding emotions when you trade.
Carry out trade with responsibility:
Trading compulsively with emotions is the two gambling forms that can end a prospective trader’s career. However, there are ways to mitigate these behaviors by minimizing leverage, reducing the amount of trades executed in a given period, defining cautious goals and targets, and never trading with money you can’t afford to lose.
When you make a loss, stop trading and analyze where you went wrong and the next day, approach the market with the same vigor. When you book a profit, take a break, don’t try to keep on trading, extending your “lucky runs.” Try to analyze what went right and replicate the same analysis to mitigate losses and book profit. This is a healthy way of not committing mistakes.
Continuing your learning curve:
Bitcoin or any other cryptocurrencies, in general, are a new asset class that is popularly discussed in the public domain. So the developers of cryptocurrencies are continuously making improvements. This is exciting as the industry is constantly evolving, presenting new trading opportunities like reduction of transaction or gas fees.
To maintain the edge of success, it is necessary to improve your trading skills and keep yourself updated with the latest crypto news. The more knowledge you have, the better it will serve and help plan your trade.
Please keep in mind that virtual money is a digital representation of value that can be used as a means of exchange, a unit of account, or a value store. Still, it does not have legal tender status.
Virtual currencies are sometimes exchanged for U.S. dollars or other currencies worldwide, but they are not currently backed nor supported by any government or central bank. Market forces of supply and demand derive their value entirely, and they are more volatile than traditional fiat currencies. Margined futures contracts magnify the profits and losses associated with this volatility.
How does bitcoin mining work?
Bitcoin is quite different from centralized physical banks. Bitcoin is a decentralized banking ledger where transaction records are kept encrypted in multiple locations by the contributors of the network. That record is called a blockchain. The blockchain is updated by the addition of new data blocks to that chain containing information about Bitcoin’s processed transactions.
The contributors add the blocks by computing and solving a complex equation generated on the blockchain system. There are a set of rules that one must abide by, and the ones who solve these complex equations are awarded in Bitcoin. Such a process is called Bitcoin mining.
The miners use expensive and complex mining rigs to carry out this complicated equation. Bitcoin mining is not as simple as you perceive. If you have a fast processor, it takes less time to compute complex algorithms and solve the equation. However, there is a catch: the first miner to solve the complex equation is the one to be awarded.
Once the miner solves the equation, a group of transactions or blocks are added to the ledger. The miner attains new Bitcoins and any fees incurred against the blocks gets added to the ledger. It is a never-ending process as once the equation gets solved, a new equation is generated, and the entire process gets repeated.
The mining rigs mentioned above are the tools for the Bitcoin miner to mint a new Bitcoin. The mining rig comprises personal computers, such as motherboard, CUP, GUP, Storage, RAM, and power supply. Miners are in a constant quest to own Bitcoin by mining. Initially, miners used their personal computers. Now miners are pooling their resources and are constantly upgrading their system to maximize the chances of getting rewarded. During the pandemic, the graphics card price surged as there was a scarcity of it due to lockdown, thus boosting the secondary market.
These mining operations use a lot of power, and thus it is expensive to mine Bitcoin. Another catch is that Bitcoin was designed to become complex with more and more miners joining the tribe. For every 210,000 blocks added to the blockchain, the reward rate gets cut in half. Thus every four years, the reward gets halved.
Bitcoin is based on a theory that only 21 million units would ever exist. To date, the total units minted are roughly 18 million. Since the rewards are getting halved, it is getting difficult to mint as even new miners are joining in the quest of getting rewarded. By 2140, the entire stock of Bitcoin will get minted.
Is Bitcoin mining profitable?
The golden age of bitcoin mining was back in 2009 when miners utilized personal computers and landed profits for various reasons. The cost to get started and operate as a miner was close to zero since they functioned on an owned setup without additional equipment. The operators could pump up productivity and proceed stress-free with a few changes in the computer setting. It was the peak when giant Bitcoin mining centers brought in their competitive power to the industry. On the other hand, small scale operators tapped in from their computer systems fixated at home and competed with other miners playing small. It was a healthy competition despite the varying electric expenses across geographical boundaries.
But everything shifted after ASICs entered the market. Individual miners were exposed to huge mining rigs with massive power. The expenses scaled up against equipment charges and energy bills alongside enhanced difficulty in mining. For certain miners, Bitcoin mining can still turn profitable. With the demand and surge noticed in this sector, all the equipment needed for mining are made easily attainable.
Despite the complexities within the market, many miners took this as a challenge and considered it a worthwhile investment. For example, in November 2021, 6.25 Bitcoins were awarded for mining a block. As a result, a single Bitcoin was worth $50,000, implying a return of around $400,000 for one block, depending on the conversion rate.
Even so, it is pretty challenging to turn a profit because of the cost of energy, the cost of specialized mining rigs, and the volatile nature of Bitcoin. Thus entering the current crypto mining market can get tricky.
Benefits and risks of trading forex with bitcoin
There are many benefits of trading Bitcoin in Forex markets. Simply put, trading forex with bitcoins gives you access to bitcoin’s inherent advantages. The following are some of the most notable advantages:
- Privacy: When Bitcoin is used to withdraw or deposit a forex trade, sensitive data like the credit card details are not exposed, especially while dealing with a foreign broker. It renders traders the ability to remain anonymous as most platforms do not require know-your-customer (KYC) details.
- Transparency: Bitcoin is completely transparent as it records and confirms every single transaction while using a network of computing machines globally.
- Decentralized: Country-specific regulations do not apply as Bitcoin is a decentralized cryptocurrency. Another advantage is that geopolitical causes and nation-specific inflation affect fiat currencies, Bitcoin is immune to it, and its valuation does not depend upon these factors.
- Trading fees: Since Bitcoin is decentralized, you avoid paying transaction fees to central banks or intermediate agencies. You can also trade with a small investment; some forex exchange companies also allow you to start with less than a dollar. The brokerage charged by a broker is also very low, attracting many.
- Trading Volume: Bitcoin and forex cannot be underestimated as the combination of both markets has enough volume to challenge and combine the global stock market to shame. Furthermore, many investors may benefit from the liquidity of any cryptocurrency asset.
Every trading asset comes with its likable benefits and daunting risks. Bitcoin traded within a forex market has its own drawbacks. Here is a list of risks that one should know before entering the unknown realm.
- Exchange rates: As exchange rates vary depending on the trading platform, forex trading with Bitcoins is not very user-friendly. Thus, you need to know the rates charged by your preferred brokers.
- Theft: There is enough news we frequently hear about Bitcoin hacks and theft. As the safety of a wallet depends a lot on the broker, thus before selecting any broker, it is advisable to choose the one who offers insurance protection for their digital currencies.
- Volatility and USD rates: Bitcoin is known for its volatile nature among all digital currencies. There are times when unscrupulous brokers use this for their benefit, thus resulting in a massive loss for the trader.
Furthermore, most brokers instantly sell off the deposited Bitcoins and hold them in USD, thus exposing the trader to dollar-Bitcoin variation rate risk.
- Leverage: Trading this way is risky, especially for newcomers, because of the drawbacks of a large leverage. High leverage can entice novice users, but many of them risk losing all of their money. What allures many novice users is the belief that crypto has its own valuation mechanism. They are part of a free-standing asset class, hence investors feel the rules vary for it. The probability of losing money increases as the introduction of another currency turns the tables from your desired profits and losses. The individual trader must realistically calculate the tradeoffs, gain as much knowledge before trading so that a viable strategy can be formulated, keeping the risk low and profits at its crest.
How is Premium calculated in Bitcoin options trading?
Options are financial derivatives that allow you to buy or sell Bitcoin at a future date. If the desired outcome does not match or does not correspond to your prediction, you are not obligated to buy or sell.
The Bitcoin Trading Options contract allows the trader to acquire the assets at a fixed price on a future set date. The trader simply has to pay an upfront fee to buy such a contract, called Premium, to the contract seller.
Imagine purchasing Bitcoin with a fixed rate of $2,000 and a contract premium of $100 for three months. There are two possible outcomes.
- If the price of Bitcoin rises to $2,500 after three months, you will have made a profit of $500, but you will only have made $400 because you paid a premium of $100. You would have made a profit of $1200 if you had brought three contracts because the premium fee was $300.
- Bitcoin’s price is expected to drop to $1000 in three months. As a result, no profit can be booked. In this instance, you can exercise your right not to sell.
Although greater leverage can be gained by investing in Bitcoin Trading Options markets, the investor must set aside time to carefully study returns before going forward with the bullish calls.
Frequently Asked Questions
Depending upon the crypto exchange, the details required may vary. Some just require your name and email. First, you need to confirm your identity that you have opened up a crypto account. Then, after confirmation, you just have to add the mode of payment either through a direct bank account or on a credit card for deposits and withdrawals.
While the others are more stringent and may require additional details besides the name and email Id. They may seek your full legal name, date of birth, address, phone number, SSN, etc.
Opening up a crypto account in an exchange is not all that difficult; all you need is a bit of patience. There are instructions for you so that you don’t have difficulty filling up the details.
There are many ways to fund your crypto account.
- Sending crypto through an external wallet or exchange
- Transferring your crypto from your account to an external wallet or different account.
- Withdraw cryptocurrency
Some exchanges will allow up to 30 days of a free trial, and after 30 days, even if you enter your login credentials, you won’t get access to it.
While some, after a 30 days trial, will allow using the free demo only after buying their live trading account. Thus it solely depends upon the crypto exchange.
All the completed transactions, your withdrawals, and deposits can be viewed on the portfolio tab found in the top-right side corner. Selecting the respective tab will allow you to view your history and pending deposits and withdrawals.
As per the company policy, unless the trader has been evaluated and approved as a Money Manager, no one other than the account holder(s) can access or trade on the account.
To make a new watchlist, go to the top of the screen and look for the plus sign at the end of the list of existing watchlists. A pop-up will appear; you can name the new watchlist with the desired name and select Create. You can add Markets through the Market Search tab once the watchlist has been created. You can select the watchlist of your choice by clicking on the “Add to” option by simply swiping on your desired market. You have the freedom to create as many watchlists as you wish for. You can switch between different “Watchlists” by selecting the tab and viewing each one.
If you have more than one trade in the same market, the trades are grouped in a single panel in the Portfolio window. You can view each constituent position individually by tapping on the section that displays the quantity of deals you have in that market. It will collapse, revealing each trade separately. Furthermore, you can toggle this view on or off by using the stack button in the upper right corner.
If you have an open position or order in a particular market and view a chart for the same market, then there are special lines representing your position or order. Make sure that you have not zoomed in too close on the chart. Additionally, try to enlarge the time frame so that the level of your position is viewable. Finally, make sure that in Chart Settings, the Show Position has both full-screen and simple chart view enabled.
You can access your statements by clicking on the ‘More option’ at the bottom and locating your “Statements” under ‘My Trading History’. Select view statements and date range when the new window pop-up. Then click on Search, and all the available statements within the time frame specified will be generated.
Swipe on any market in the ‘Markets’ or ‘Watchlists’ tabs and tap ‘More.’ Now select ‘Market Information’ after scrolling down to ‘Preferences,’ then use the selector to update your price tolerance.
Alternatively, you can also update your price tolerance by tapping a market to open its detailed page. Then, scroll down to settings and alter your price tolerance by selecting the ‘INFO’ option.
Along with personal information, we at BlockchainTradin also request financial and tax identification information to comply with Commodity Futures Trading Commission (CFTC) rules and U.S. government laws. We have requested personal information and financial information from both new and existing customers. In addition, BlockchainTradin complies with the rules of customer identification of the USA Patriot Act of 2001. As per this rule, BlockchainTradin needs to collect the client’s data and maintain their information. Thus, we must request your financial statements like bank accounts or card statements.
You can open up an account for a minimum of $100. However, we recommend depositing at least $2,500 to provide you greater freedom and control over the risk while trading on your account.
We will send an email to confirm that your account is now activated and you are now free to trade. However, you can also try logging on to your account to check the status.
You can request an additional account by logging in to My Account, going to Account Settings, and selecting Add New Account.
Documents that can be used to verify your identity include, but are not limited to:
- Your current passport
- Your current driver’s license
- National I.D.s. Depending upon the scenario, other types of I.D.s are also acceptable.
Bitcoin is a peer-to-peer electronic monetary system not regulated by a government or central bank, but cryptographically safeguarded. The security and protection of transactions are overlooked with blockchain technology’s verification mechanism.
Of course, Bitcoin can be shorted by betting its inherent price volatility against derivatives like futures and options. However, it must be remembered that there are many risks associated with shorting.
There are plenty of ways to short Bitcoin and book a profit. Here are some of the most prominent sorting methods;
Shorting against the;
- Binary options Trading
- Margin Trading
- Predictions Market
- Futures Market
- Bitcoin CFDs
- Short-Selling Bitcoin Assets
- Inverse ETFs
Many cryptocurrency exchanges allow users to gamble on Bitcoin’s plunging prices using leverage or borrowed funds. However, you should be cautious while exercising this option, as both profits or losses can be magnified using leverage. Thus the risk is proportionally greater while using leverage.
If you wonder which is the best exchange, then look no further. Contact us at BlockchainTradin. We have been catering to our clientele for a long time. We have a team of experts and professionals working around the clock, at your disposal, for solving your queries.
Join in on our ever-increasing family of Cryptocurrency traders. We are just a click away!