Hedging in Bitcoin with Hegic options

Hedging in Bitcoin with Hegic options

By paragism | paragism | 17 Nov 2020


Thursday, March 12th of 2020, is known as ‘Crypto Black Thursday’. The prices of all cryptocurrencies tanked on that day in sync with a global financial market crash due to the breakout of coronavirus pandemic. The order book depth in all exchanges vanished. Liquidity crunch and forced liquidation of vaults slashed the prices of many coins/tokens to the bottom. Bitcoin price fell to a low of $3,900. The pandemic related global financial crash ended by the end of March and Bitcoin recovered to a great extent. Since then, the recovery rally hasn’t ended for Bitcoin. The recovery trend is also associated with strong upward movement of S&P500 and the global stock market. Bitcoin is often dubbed as ‘digital gold’ but it has outperformed the original safe-haven asset and emerged as the best performing asset class of 2020. Recently, the price of Bitcoin climbed above $16,000. The all-time high of Bitcoin was $19,665.39 and that happened 3 years back in 2017. Bitcoin has closed above $16,000 for only 14 days in its entire history earlier. Now it looks stable above $16,000. Bitcoin seems to have heavily decoupled from the equity markets and the bullish narrative is increasing day by day. Corporate buying of Bitcoin has astonishingly increased in the last few months.

Bitcoin price volatility

Bitcoin looks good. Really good! US payment giant Paypal opening crypto services to millions of eligible account holders in the US was an ultimate bullish signal. Most probably we’ll see a new high very soon. But the price volatility of cryptocurrency is a known matter and even the numero uno crypto is no exception to that. Bitcoin’s value has been historically volatile. For instance, the 30-day volatility of the price of bitcoin reached nearly 10.93% on 31st March 2020. Presently BTC/USD 30-day volatility is approximately 2.84%. The news which scares the investors often is the statements by various governments regarding the regulation of cryptocurrency.


Image Source - Bitcoin Price and Volatility based on the standard deviation of daily returns for the preceding 30-day window.

Hegic options to counter the risk

Hegic is an on-chain peer-to-pool options trading protocol built on Ethereum. The protocol was released in the month of February 2020 but it caught the crypto community attention very recently. Here is their open-sourced codebase in the GitHub repositories. Options are popular in the traditional financial market although generally these are used by expert traders. Options provide different types of strategic alternatives and these are used as hedging tools. Options often help to derive higher yields and extend an olive branch to minimize losses. The leveraging power of options are undeniable and Hegic brings that to cryptocurrency with a user-friendly interface.


Hegic platform UI – From Hegic website

"The Hegic protocol pioneers a peer-to-pool approach to options trading. It works like an AMM (automated market maker) for options. You can trade non-custodial on-chain ‘call’ and ‘put’ options as an individual holder using the simplest and intuitive interfaces. Use MetaMask, Trust Wallet or Argent wallets to trade options without KYC, email or registration required.” – Hegic blog post



On-chain options data summary of Hegic

How does it work?

An option is a contract which gives the buyer the right to buy (call option) or sell (put option). A right is a right and no obligation. These options are on-chain derivatives for the traders to speculate or hedge their positions. The crypto options platform of Hegic is growing organically with billions in open interest. Do you want to buy Bitcoin above $16,000 thinking it may reach new ATH but scared due to price volatility? Try Hegic put option then. It allows you to buy WBTC (Ethereum wrapped Bitcoin) options. You can decide the strike price here. The strike price is the key variable of options. Presently, Hegic is offering 1 day to 28 days options. I have given a simple example below. Three situations are there. If Bitcoin price increases massively, you gain well. If Bitcoin price goes up moderately, you still gain decently. If Bitcoin price goes downside, you minimize your loss. Hegic options help you to hedge against the investment risk. The options offered by Hegic are American type ‘Exercise Early’ options so you’ve no need to wait till the expiry date.


Illustration and calculation made by the author

DeFi or decentralized finance is evolving fast. All traditional financial concepts are getting new lease of life on-chain. A censorship-free, non-custodial crypto options trading with an on-chain transparent settlement is a much-needed platform. But such platforms should be properly audited to avoid smart contract risks. The rat race of yield farming is exciting but it is a surreal game. We need real alternatives to the services offered by the centralized brokers in DeFi. Blockchain is a field where innovation takes place at lightning speed. That is the beauty of blockchain technology. The king of crypto is definitely looking for a new ATH and this is good news for the market. Every new ATH brings a lot of new investors and helps the market to grow. Futures and options lead to balanced price discovery and stability in the long term. We need to embrace them anyhow. The dream of total on-chain future price discovery is not far away maybe.

Note: This post was first published here for Cryptowriter in association with voice.com.

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Cypherpunk. Writing content which I love. Creeping on the blockchain. Founder - www.thecoinbuzz.com Twitter - @paragism


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