The cryptocurrency market has evolved greatly in recent years. However, it is still at an early stage in relation to other financial markets. While there are some derivative instruments in the cryptocurrency market, in the next stage of development more appropriate derivative instruments are needed.
A similar progression has taken place in other financial markets such as precious metals, hydrocarbons, metals, stocks, currencies, and so on. The cryptocurrency market is waiting for derivative instruments that are correctly implemented for its’ specificity.
At the heart of the problem is the high level of volatility that currently exists, as well as, other factors described in the article. For those reasons, it is quite difficult to create a highly liquid and properly operating market for derivatives on Bitcoin or any other cryptocurrency.
In order to hedge or simply speculate on rising or falling prices, option sellers are required. However, due to the specifics of the existing market (factors outlined in the above-mentioned article), at certain times there are no such sellers. Even if sellers do exist, they want very high premiums which makes buying those options impractical.
How did we solve the problem?
Our company developed a method in which participation of sellers is not required. We also developed a working model of this method in a form of a visual tool. We began with a model that’s used today in sports betting – called parimutuel betting.
In essence, all bets go into a pool and are then distributed amongst the winners, after the event in question takes place. However, such a method has limitations for use in the financial markets.
The amount of potential gain is unknown in advance. This is a problem because in order to hedge or sell short, a trader needs to know in advance what the amount that he or she will receive when the underlying asset hits a certain price in the future.
We created a method opposite to that of parimutuel betting and called it reverse parimutuel – a method in which an option premium is variable, but is always at the best possible price and is the same for all participants.
Because the price of the premium is known in advance, the gain relative to the price of the underlying asset can be calculated. The premiums for our options consist of the price of one or more of so-called price ranges, which are the building blocks of our options.
To solve the problem of determining a single premium for all participants for the same basic contract, we adopted an auction model. During the auction on the APO platform, all participants submit market or limit orders, just as they would in the familiar centralized exchanges.
At the end of the auction, the algorithm calculates prices for the ranges, and then calculates prices for all options that have bids.
This process is shown in a demo of the algorithm on our website . The APO platform differs from standard centralized exchanges in that its’ operation does not require sellers to participate and payments from the collective pool are guaranteed to the winning bidders.
The platform can handle all kinds of different options – from classic calls and puts to sophisticated option constructs of any complexity.
The addition of a derivative cryptocurrency instrument with a guarantee of payment on expiration date benefits all participants. For example:
- Miners can insure against the risk of depreciation in order to maintain profitability;
- Individual traders can use options to speculate on falling, as well as rising, prices;
- Companies conducting ICOs can protect the cryptocurrency value raised during the ICO so that;
- it will not be diminished by price fluctuation when they need to convert it to fiat money.
By participating today in the creation of such a tool, you can be at the forefront of a fundamental change in the derivatives market, as well as in the cryptocurrency market.