Institutions are increasingly using proven bitcoins options techniques on alternative cryptocurrencies to protect against price swings and earn additional returns, STS Digital, a primary trader specializing in digital asset derivatives, told CoinDesk.
“Our client base includes foundations and token projects, investors with large holdings, and asset management firms that manage exposure ahead of liquidity events,” said Maxime Seiler, co-founder and CEO of STS Digital. “Increasingly, we are also seeing these participants apply options strategies that were historically used in Bitcoin into the altcoin space.”
Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price at a later date. A call option represents a bullish bet, giving the buyer the right to purchase the asset at a specific price at a later date. A put option represents a bearish bet, protecting the buyer from a price drop.
Basically, the options seller is writing insurance against bullish/bearish movements in exchange for an initial compensation, called a premium.
Institutions that hold bitcoins tend to sell options, writing call options on BTC at levels above the current market price and collecting the premium. This premium represents additional income on top of your spot BTC holdings.
This covered call strategy has been one of the most popular institutional plays since the crisis of early 2020. Institutions have also looked to other methods, such as writing bitcoin puts to increase income during price rallies, buying puts as a downside hedge, and buying calls to participate in the bull run.
Now, institutions and other entities, such as founders of projects that own large amounts of altcoins, foundations, venture capital firms, and private players, are using the same playbook on other cryptocurrencies or altcoins.
According to Seiler, these strategies are increasingly being applied in altcoins since the October 10 crash, in which exchanges forcibly closed even for-profit bets (automatic deleveraging) to socialize losses.
“Beyond covered calls, institutions are actively using options selling for yield, short covering, and call buying for upside with defined risk. These strategies are increasingly being applied to altcoins as investors look to manage exposure without taking on the forced liquidation (ADL) risk that fueled the October 10 crash,” Seiler said.
“It’s a clear example of why options are a stronger way to express risk in volatile markets,” he added.
STS Digital is a regulated digital asset trading company that acts as a primary dealer for institutional investors, providing liquidity and listing options, spot trading and structured products in over 400 cryptocurrencies.
The breadth of its offering allows the company to address growing demand for altcoin options, while centralized platforms like Deribit focus on derivatives for majors like ETH, XRP, and SOL.
The company annually settles billions in altcoin options volume through bilateral exchanges. All transactions occur directly between STS and clients, with STS taking care of the other side of the deal to provide liquidity and instant execution.
Seiler expects continued growth in options linked to bitcoin and other tokens 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 exposure to digital assets. As adoption has accelerated relentlessly over the past year, periods of consolidation and low volatility are increasingly seen as attractive entry points ahead of the next wave of market catalysts,” he said.
