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Bitcoin derivatives that cost $1m will soon be worthless

When the options were purchased, causing a stir in crypto circles, Bitcoin was trading at about $16 200.
Picture: Bloomberg

The biggest-ever bet on Bitcoin options is about to expire worthless.

Purchased for almost $1 million on LedgerX’s trading platform just days after Bitcoin peaked a year ago, the call options have a strike price of $50,000 and an expiry date of December 28, 2018. For the contracts to retain any value at expiry, Bitcoin would need to rally more than 1 200%.

The options’ almost certain wipeout is a less-than-ideal outcome for the buyer, but it may not be quite as bad as it seems.

Ari Paul, a cryptocurrency fund manager at BlockTower Capital, has indicated that he bought the options while simultaneously selling some of his fund’s Bitcoin holdings. In a December 2017 interview with CNBC, Paul said the trade allowed him to lock-in some profit, reduce exposure to market declines and potentially earn a big payout if Bitcoin soared above $50 000.

When the options were purchased, causing a stir in crypto circles, Bitcoin was trading at about $16 200. The virtual currency has since tumbled to $3 800, mired in one of the worst bear markets since its inception a decade ago.

“These calls let me capture upside while reducing my downside risk,” Paul told CNBC. He later tweeted that the trade — selling some of his Bitcoin holdings while buying the call options — was profitable.

Paul, a former portfolio manager at the University of Chicago endowment, didn’t disclose the performance of his entire fund. BlockTower declined to comment.

LedgerX, the first US-regulated Bitcoin options exchange, declined to identify the buyer or seller of the calls but confirmed that the position, which has a notional value of $13.75 million, remains the biggest Bitcoin options trade to cross its platform.

© 2018 Bloomberg L.P

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A derivative of something virtual?

Most Mathematicians struggle to explain a derivative,
why invest in something most people cannot explain or understand it?

A derivative is either a hedge or a speculative position. The advantage of the derivative over the underlying is that performance is guaranteed by the exchange, and that gearing can be applied. The derivative tracks the price of the underlying and the only difference is the basis costs. A call option on a derivative on bitcoin gives you the right, but not the obligation to own bitcoin if the price is above the strike.

People and institutions use derivatives to avoid the risks inherent in contracts for physical delivery – they mitigate risks of physical contracts. The speculators accept the price risk that the hedgers do not want.

This guy decreased is risk of losses while keeping some exposure to the upside. It is very similar to buying insurance on your car. You hope that you pay all your premiums in vain. If you do have a claim it means that you and your car are lying in the ditch.

A 1st order derivative of a pyramid is the rate at which physical and chemical weathering of its building blocks take place, the 2nd order derivative is the change in this rate. It’s quite easy.

The guy is talking nonsense. A call does not limit downside risk at all. He reduced downside risk by selling some of his bitcoin, not by buying the call.

He basically loses what he paid for the option so the only way the “trade” was profitable was if he made money on selling the bitcoin at $16000. It doesn’t say how much he sold, so we’ll never know.

I still like bitcoin so much. I never regret that I take time to read some free courses about Bitcoin and cryptocurrencies on the CryptoManiaks because it’s all worth it.

End of comments.





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