Binance announced today a new type of Bitcoin options contract that will simplify things for traders and will let them issue their contracts for the first time.
Named “European-Style Vanilla Bitcoin Options,” users are allowed to buy Bitcoin at an agreeable price upon contract expiration, then trade it for other cryptocurrencies.
European-style contracts departed from American-style options that Binance launched in April this year, it allows traders to purchase the Bitcoin anywhere, right until the contract expires.
European-style contracts are named “vanilla” options contracts for they are less “exotic” than the complex American options contracts, the company states, which allowed itself to trade in China.
Binance says that the European-style contracts also safeguard traders from volatility: investors can put these contracts on Bitcoin sale at a specific price in an agreed time frame. They are settled in the US dollar-pegged stablecoin, Tether (USDT).
The European-style contracts come with greater risk and a possible reward. While Binance was the only issuer of American-style contracts, traders can issue these European-style options by themselves.
It means that traders have their own set of rules: there are no limits on the size of the contract, as long as the issuer has enough collateral.
And it implies that buyers can pay a greater premium for the contracts, but also an issuer is obliged to fulfill the contract, even when Bitcoin’s price reaches a massive amount of dollars.
Binance stated that it is launching the European-style contracts to boost investment from institutional investors; the exchange hit $1B in daily volumes for trading options this month and looked upon that it is time to kick things up a bit.
Bitcoin options are a famous way to invest in the cryptocurrency. It is expected that open interest in Bitcoin options will surpass $10B next year.
However, a bitcoin market that is full of options contracts is a volatile one. If the price of bitcoin increased by the time contracts expire, traders can dump some of it to cash out on their investment. When enough traders dump at the same time, the price of Bitcoin can drop.
Last December 25, some $2.3B in Bitcoin options contracts ran out, unleashing all the bitcoin onto the market.
Bitcoin’s price jumped by $4,000 in 2 days, hitting an all-time high after another all-time high.