Due to the unique characteristics of the cryptocurrency market, where rapid price swings are commonplace, it’s surprising that we don’t hear too much about risk hedging.
While options desks meet the requirements for hedging tools in traditional markets, the crypto world does not enjoy the same level of interest in hedging strategies, tools and platforms to make the whole process of price risk management easier for hodlers.
There actually do exist a number of established options platforms for crypto already, but these may be about to get a major new challenger in the near future, as new DeFi protocols, which offer innovative alternatives to options desks, are poised to seriously disrupt the 50-year-old options industry, are getting ready to roll out.
A number of crypto options platforms have opened in the last few years, and have attained some pretty impressive TVL’s, and, as is often the case, some clear winners have dominated the space.
Today, Deribit, one of the original platforms offering crypto options, remains the clear frontrunner in what is still a relatively niche market, taking a healthy majority of market share in both Bitcoin and Ethereum options.
Other platforms, including Hegic, Lyra and Opyn to name but a few, have made significant strides in peeling away some market share from Deribit, and exchanges including Binance and OKX also offer options trading, but as is often the case, Deribit’s first mover advantage has seen them dominate the space for many years.
In the last few days, the Chicago Mercantile Exchange (CME) Group announced plans to expand its range of cryptocurrency options for Bitcoin and Ether. Ostensibly aimed at more institutional and high-net-worth players, CME is clearly betting on the two top cryptos continuing to grow in popularity in the coming years.
CME’s decision to broaden its suite of cryptocurrency options supports the notion of increasing demand for crypto hedging tools and generally highlights the desire for more sophisticated and versatile risk management tools in the crypto space.
Of course, volatility affects everyone, not just the big players, and retail crypto users are also becoming increasingly more aware of the need for practical ways to protect themselves from downside shocks, particularly after the colossal bear market which lasted the entirety of 2022.
And, really, most retail crypto users are only aware of one risk management tool, the humble stop loss — which is great in long declines, market crashes and black swan events, but which is relatively unsophisticated and ‘clunky’ and often exhibits some unintended consequences.
Sure, there are plenty of degens who are well versed with options desks, enough to be comfortable with paying the premiums for calls and puts, depending on their overall outlook, but these really make up a tiny fraction of the addressable market of retail crypto enthusiasts out there, who all share the same concern — i.e. don’t get rekt!
The problem is that options aren’t the most intuitive way to hedge against risk. Sure, if you’re prepared to do the learning, they’re great, but the average retail investor has neither the time nor the inclination to learn about Greeks, implied volatility, Black-Scholes or the various different blended strategies often employed by options traders.
Ultimately what retail wants is simplicity, ease, time and price savings, and if you get that, well then, this tends to be a winning combination for platform developers.
And this is where DeFi comes in. By providing more accessible, efficient, and versatile hedging solutions, DeFi protocols will cater to a broader audience of investors, including both retail and the more sophisticated corporate and institutional players.
As demand for hedging tools continues to grow, we can expect to see even more groundbreaking products entering the market, reshaping how investors approach risk management in the cryptosphere.
One such contender is Bumper, a DeFi protocol which is designed to provide a fairer, more price-efficient and simpler form of hedging for crypto enthusiasts. Unlike an options desk, Bumper’s novel protocol provides protection against downside volatility to the discreet tokens held by users, something which options desks don’t generally offer.
Bumper offers protection seekers a synthetic ‘Bumpered asset’ which can be used to participate in other DeFi protocols even whilst their original tokens are hedged against price drops — and simultaneously still having the ability to both enjoy upside moves.
More impressively, Bumper achieves all of this with an extraordinarily small amount of clicks on their retro-themed dApp. Protection seekers can choose a price floor and a term and that’s pretty much it — their wallet is protected against downside volatility, with daily calculated premiums and no up-front fees to pay.
This innovative approach to risk management has the potential to unify risk management between the more sophisticated investors and the retail sector by designing a complex methodology with a simple and efficient means of access that makes it much easier for users to wrap their heads around.
For more information on Bumper, visit the website or join the Discord community here.
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In this article, we compare using Bumper with Put Options and examine its advantages for DeFi traders wanting to trade volatility with more flexibility.
