Institutions increasingly use verified Bitcoin STS Digital, a major trader specializing in digital asset derivatives, told CoinDesk that options technology for alternative cryptocurrencies could protect against price swings and earn additional returns.
“Our client base includes token projects and foundations, investors with large stakes, and asset managers managing exposure ahead of liquidity events,” said Maxime Seiler, co-founder and CEO of STS Digital. “We are also increasingly seeing these players apply options strategies historically used on Bitcoin to the altcoin space.”
Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price at a later date. A call option represents a bullish bet that gives the buyer the right to purchase an asset at a later date at a specified price. A put option represents a bearish bet that protects the buyer from a drop in price.
Option sellers essentially buy insurance against a bullish/bearish move in exchange for an advance payment called a premium.
Institutions holding Bitcoin tend to sell options, selling Bitcoin call options at a price above the market price and collecting the premium. This premium represents additional income on top of their spot Bitcoin holdings.
This so-called covered call strategy has been one of the most popular institutional strategies since the crash in early 2020. Institutions also seek other methods, such as selling Bitcoin put options to increase revenue during price increases, buying put options as a downside hedge, and buying call options to participate in bull markets.
Now, institutions and other entities such as project founders, foundations, venture capital firms, and private actors with large altcoin holdings are using the same strategy in other cryptocurrencies or altcoins.
Seiler said altcoins have increasingly adopted these strategies since the Oct. 10 crash, when exchanges even forcibly shut down profitable bets (automatic deleveraging) to socialize losses.
“In addition to covered calls, institutions are actively using put selling for gain, downside hedging, and call buying for upside with defined risk. These strategies are increasingly being used in altcoins as investors look to manage exposure without taking on the forced liquidation risk (ADL) that led to the Oct. 10 crash,” Seiler said.
“This is a clear example of why options are a more powerful way to express risk in volatile markets,” he added.
STS Digital is a regulated digital asset trading company that serves as a primary dealer for institutional investors, providing liquidity and quote options, spot trading and structured products on over 400 cryptocurrencies.
The breadth of its products allows the company to meet the growing demand for altcoin options, while centralized platforms like Deribit focus on derivatives for major currencies such as ETH, XRP, and SOL.
The company settles billions of dollars in altcoin options annually through bilateral transactions. All transactions occur directly between STS and clients, with STS acting as the other party to the transaction providing liquidity and instant execution.
Thaler expects options related to Bitcoin and other tokens to continue to grow in the coming years.
“Looking ahead, we see strong and sustained institutional adoption continuing to drive demand for options as the preferred way to manage digital asset risk. As adoption has accelerated over the past year, periods of consolidation and low volatility are increasingly viewed as attractive entry points ahead of the next wave of market catalysts,” he said.