• The derivatives market, and in particular options trading, has seen exponential growth in the DeFi sector and is expected to see further growth in 2023.
• Options provide traders with the ability to tailor trades and risk tolerance, allowing them to express investment views that incorporate new elements.
• The growth of DeFi options trading is hindered by the lack of knowledge about external events and how they affect the crypto market, however the use of data to analyze trends and events will help to increase adoption.
The past few years have seen a massive influx of investors into the cryptocurrency space. This influx has been driven by the promise of decentralization and self-custody, as well as the potential for economic empowerment for all. This promise has been realized in the form of decentralized finance (DeFi). DeFi has given rise to a diverse range of investment opportunities, with one sector in particular poised for exponential growth in 2023: derivatives.
Derivatives, and more specifically options trading, offer investors the ability to customize their trades and risk tolerance. Options allow investors to express investment views that incorporate elements such as price, timeframe, and velocity. The DeFi options market currently has a combined total value locked (TVL) of over $180 million, and has plenty of room to grow. If the crypto options market were to match traditional finance levels, it would need to see a 30 to 35 times increase.
So what is preventing the options market from achieving this growth? The main difference between crypto options and traditional finance (TradFi) options is that we are still learning how external events affect the crypto market. In TradFi, investors have access to earning reports or substantial company news covered by the media to inform their trades. However, crypto is still trying to figure out what is important. When someone tweeted that Vitalik Buterin had died, ether (ETH) temporarily “crashed” on the “news” before swinging right back, which shows how quickly the crypto market can move.
Fortunately, trading strategies like options provide us with ways to mitigate losses and customize risk levels. Our underlying blockchains also provide us with access to an enormous amount of consistently-generated, granular data such as spot data, which can be used to analyze trends and movements. The more DeFi is used, the more data we have and the more we learn.
DeFi options trading will continue to see exponential growth due to its dynamic nature, massive investment prospects, and soon, ease of access and use. Once the barriers to entry are reduced and more investors start to see DeFi for the evolution in our economy that it truly is, options trading will help drive adoption. With data-backed strategies and the right tools, DeFi options trading could become one of the most popular investment strategies of 2023.