Trading Light: A New Approach to Bitcoin Derivatives
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Cryptocurrency derivatives have been carving out their market for half a decade now, and a June report by data analytics company CryptoCompare shows that they now make up 32% of the market and have been growing at a significantly faster pace than spot trading. Although institutional interest led to an increase in trader interest for derivatives, one of the biggest reasons is still the recent lack of volatility in the cryptocurrency market. This is especially true for Bitcoin, which has remained relatively stable for months, so it should come as no surprise that traders are looking for ways to make their job more exciting.
Derivatives, Futures, Options… What?
A derivative, by definition, is a contract between two or more parties that has its value derived from an underlying asset and its price fluctuations. One subset of derivatives are options, which give the holder the right, but not the obligation (unlike futures) to trade the underlying asset at what’s called the strike price either on or before an expiration date.
Going even deeper into options, there is one subset often called the all-or-nothing option: will an underlying asset be above a certain price at a certain time? If you, the trader, believe it will be above that price, you buy the option; if you believe it will be below that price, you sell the option. If your prediction is correct, you get the value of the underlying asset, but if it’s not, you get nothing and lose your stake — which is where its name stems from.
When it comes to cryptocurrency derivatives (and options) trading, a large part of their success is owed to institutional backing, especially when Bakkt, a New York Stock Exchange-backed company, started offering physically settled Bitcoin futures contracts. But as futures force the holder to buy or sell, while options only give them that right, many prefer making that choice themselves, leading to an increase in options popularity.
Introduction to Light.CX
Light.CX is a newcomer to the options trading scene, looking to make the process easier, more transparent, and ultimately more enjoyable for everyone involved. The idea was born when the founders, with a doctorate in math and a background in finance, realized that Bitcoin options trading is a huge, largely untapped market that needed a robust and trustworthy platform that would simplify the process to attract veteran traders and newcomers alike. It was also very much a maths game more than anything else — so figuring out a way to make all-or-nothing (sometimes called binary) options accessible and transparent to cryptocurrency traders was a perfect match for his skills.
What Light.CX offers right now, for their launch, is a five-minute Light option. The trader chooses a strike price and decides whether they believe the market will finish above or below the strike once those five minutes are out. This makes for quick, dynamic trading and is especially beginner-friendly, since newbie traders can try their hand at it without the stress of waiting for very long for the results.
One of the key features of LCX is that the risk and reward of every trade are pre-defined. This means there are no surprises, no margin calls, and no auto-liquidation. Traders can have comfort in knowing their exact exposure in advance.
Additionally, if new traders (or anyone else) don’t feel comfortable putting any of their money at risk, Light.CX offers a free sandbox trading environment. When you open an account, you get USD 10,000 to test all the platform’s features with it. If you already have a good grip on the basics, this can also be used to test existing strategies and develop new ones, collect data to make and test your own trading bots, and similar.
Light.CX plans to develop other unique derivatives, until one day they’re the “Willy Wonka of derivatives,” as the founders put it — but for now, the five-minute Light option is the one exciting option they’re starting with. Anything more would be too much for opening, they believe.
What Light.CX Does Differently
Binary options are a highly controversial financial product and are, in some instances, even treated as a form of gambling. The issue arises when dishonest brokerages that are actually acting as bucket shops, or facilities that pretend to be exchanges but are actually only used for betting on prices. The so-called brokerage will manipulate price data in their favor, refuse or stall withdrawals, and simply ban customers if they’d rather not pay them out.
Light.CX recognizes this issue, and developed a fair and honest way to trade all-or-nothing derivatives. The idea of a derivative with fixed risk and reward was very attractive, but needed to be carefully designed to ensure transparency and eliminate potential for any cheating.
This is also where its name comes from: not only did they re-engineer a lightweight derivative, but they’re also shedding light on a trading method that has long been intentionally kept in the dark.
In line with the goal of transparency and fairness, Light.CX has defined four key aspects of the light derivative:
1) The first notable difference is that traders are not betting against Light.CX. The platform is a high-speed order-matching service that follows standard financial exchange protocols. This means that traders are free to buy or sell light options with traditional market and limit orders.
2) Light.CX does not set any prices – option premiums are determined on the open market through the standard orderbook.
3) The price index used for settlement is 100% transparent. On the website, users can also find an in-depth explanation of the way they calculate their price index, and the raw data that is used to calculate it is uploaded to the Amazon cloud on an hourly basis.
4) The only fee the platform charges is 1% of the payout to the winning party of each contract. This means that LCX has no financial incentive in the outcome of the derivative contracts.
Perhaps most importantly of all, Light.CX offers everyone the chance to learn what trading options means, how it is done, and how they approach it. Everything is publicly available on their website, and they stress that Light options are fixed risk, fixed reward, which goes a long way to offer traders peace of mind.
Is Light.CX Safe?
Everything comes down to a simple question: is using Light.CX safe? The answer is even simpler: yes. Not only is the platform safe to use, but it is also committed to doing everything in its power to make the process even safer and more transparent.
Should you be using Light.CX? This is a highly personal choice. What we can say, however, is that if spot trading has lost its appeal and you’d like to try something new without having to use shady platforms with anonymous founders, then what are you waiting for?