The crypto market has been brutalizing of late – but many traders don’t realize that there is a plethora of financial instruments out there. Each offer investors a new way to back crypto, without relying on the highs and lows of cryptocurrency prices in an erratic and volatile market.
But what are these alternatives – and are they really everything they’re cracked up to be?
In many cases, some of the new products emerging in the crypto market are iterations of services that have existed in the old-fashioned financial world for years. Bonds are a good example. These have been kicking around for more than 500 years – and back in 1694, they were issued by the Bank of England to fund a war against France.
How do they work? In essence, they are a fixed-income instrument that amounts to something of an “I.O.U.” Lenders give businesses the money that they need to achieve their aspirations, with borrowers usually receiving interest rate payments once per year until the full amount of the loan is due. When it comes to interest, this could fluctuate based on variable rates, or it may be fixed.
Bonds have already been gaining momentum – with the World Bank hitting the headlines back in summer 2018. On August 10, the first blockchain-based bond was issued by the biggest bank in Australia - Commonwealth Bank of Australia. This is not the first debt instrument to be issued through blockchain – with Spain’s BBVA signing a $117 million loan over the summer in a bid to benefit from the traceability and transparency of smart contracts.
The hope is that crypto bonds could enable blockchain-based businesses to generate money to grow – offering them an alternative from ICOs, which have had something of a torrid time of late. Although research in October suggested that more than $20 billion had been raised through initial coin offerings since the beginning of 2017, this has been slowing of late – with ICO funding for August 2018 ranked the slowest for 13 months.
Futures: The future?
Futures have been a hot topic of discussion in the crypto world ever since Bitcoin reached the dizzying highs of $20,000 towards the end of 2017.
These conversations have rumbled through right up to today, with the volatility seen in the crypto market showing no signs of abating. In brief, futures involve two parties agreeing to buy or sell cryptocurrencies at a previously agreed-upon price on a set date. Rather than being used as a mechanism that helps to boost profitability, futures are often relied upon as a way to mitigate risk.
Why is this a compelling financial instrument? Let’s say you believe that Bitcoin’s value is going to rise in the coming months. You can buy a three-month contract for one Bitcoin at the current price and receive it at contract’s conclusion. If the price of Bitcoin rises dramatically over those 90 days, you would be buying it at the same price, resulting in a tidy profit.
Of course, this instrument can work conversely. Let’s imagine that you bought Bitcoin at an optimal moment, but you think that the price is about to fall precipitously. Through futures, you have the opportunity to enter into an agreement where you sell the Bitcoin at its current price in three months’ time – and if its value tumbles, you pocket the profit. It’s fair to describe such behavior as a bet, as no one can predict where the market is going, but if you’re experienced and have insight into crypto movements, futures could prove indispensable.
So yes: futures can help traders shield themselves against the perils of fluctuation – and give investors in countries where crypto is banned a chance to get involved. That said, it isn’t without risks. Given the dramatic highs and lows seen in crypto in recent months, you could argue that futures are tantamount to gambling. Red or black?
There are other options
Puns can never let you down during a heavy feature that focuses on crypto financial instruments. If you don’t think that futures are the future, options are an option for you. These instruments mean that you have the right to buy or sell Bitcoins at a particular price when the options mature, but you are not obligated to complete the transaction. There is often a premium for using these financial services.
These dramatic shifts in the crypto market have sparked diversification by digital asset platforms – giving investors greater choice. Bonds, futures and options are beginning to flourish in the industry. For example, Bibox, an AI-driven exchange, has just launched bonds, aiming to give new opportunities to traders.
A slowdown in ICOs has meant that startups are looking for new ways to raise capital, while investors are on the lookout for new ways to protect and grow their assets. Whether derivatives gain momentum in 2019 is yet to be seen, but there’s no doubt that chatter surrounding financial instruments is on the increase.
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