Desperate to survive the collapse of their market, cryptocurrency diehards are reaching into the financial tool kit to raise some old-fashioned cash.
They’ve begun selling derivatives linked to digital tokens to squeeze something out of their depreciating assets. Their need is so acute that ventures run mainly by software developers and tech experts are negotiating the terms with financial pros who earned their chops on Wall Street.
It’s the cost of surviving what’s come to be known as the crypto winter—and a stunning turnaround from the mania that drove Bitcoin up by 1,400 percent in 2017. The most valuable token is down about 80 percent from its peak. For the other side of the trade, it’s an inexpensive way to bet on a rebound.
“Anyone sitting on a stockpile of tokens saw in the bear market of 2018 that their business is at the mercy of crypto prices,” said Sam Bankman-Fried, chief executive officer of Alameda Research, a quantitative trading firm for digital assets in San Francisco. “It can be crucial for those players’ survival to have some cash if digital asset prices go down.”
Miners, who produce new coins and verify transactions, as well as companies that raised money in the initial coin offering boom of 2017, are having to get creative to keep the lights on. They are among the main sellers of derivatives similar to covered call options, a trade popular among stock investors.
Options trading has also been propelled by a growing crowd of ex-Wall Street professionals who have quit traditional assets for crypto. Key players include QCP Capital and Akuna Capital, firms staffed by former employees of hedge funds and high frequency trading shops.
While Bitcoin futures, which were introduced in late 2017, trade on public markets managed by regulated companies such as CME Group Inc., most options trades, which began appearing about six months ago, are private bilateral contracts. That means official statistics are hard to come by.
Interviews with a dozen crypto traders and investors from New York to Sydney yielded a variety of estimates on sales volumes, from $125 million per month to $500 million, and differing views on whether the main users are professional counterparties trading between themselves, or the miners who create the digital assets and other large token holders.