Binance is preparing to launch crypto options trading later this year

Crypto exchange Binance is preparing to launch trading for options contracts later this year, The Block has learned.

Two sources with knowledge of the matter detailed the ongoing process to The Block. One source said that Binance has been meeting with relevant market participants to kick off the initiative in late Q2 or early Q3.

A Binance spokesperson declined to comment when reached, saying: "Happy to let you know when we have more to share."

Binance already provides trading in futures contracts. The service went live last September, and currently supports various cryptocurrencies, including bitcoin (BTC), ether (ETH) and XRP.

As the world's largest spot crypto exchange is now looking to expand into options, the move will put it in direct competition with market leader Deribit.

Deribit hit the scene early on and is consistently ranked number one in terms of open interest, or the value of outstanding bitcoin options contracts that have not yet settled, according to data from Skew. OKEx, which launched bitcoin options last December, is also catching up.

Source: Skew, The Block Research

Interestingly, regulated exchanges such as CME Group and Intercontinental Exchange's Bakkt, have not attracted significant volumes since their launches in recent months. Bakkt, in particular, has seen zero trading volumes for its bitcoin options, according to the latest weekly data available (Feb. 18-26). CME, on the other hand, has traded over 180 lots of the options during the same period, according to data from its website.

Deribit continues to be a dominant player despite these recent bitcoin options offerings. Thus, the question becomes: will Binance's entry into the market change the game?

'Not stealing Deribit's pie'

Darius Sit, managing partner of QCP Capital, a Singapore-based trading firm active in crypto options, told The Block that the increased competition would only increase volumes of Deribit. "The nature of exchange markets is that most of the flows eventually trickle down to the dominant exchange," he said.

Sit explained that OKEx's options, for example, are "pretty much back-to-back against Deribit. So when folks trade on OKEX, they get volume, but Deribit's volume increases as well."

The same is the case with FTX, he said. "We are 2/3rd of FTX's open interest and a lot of these trades are basis/spread trades against Deribit so same thing here, FTX gets options volume but Deribit volumes also go up."

So, rivals are "not stealing Deribit's pie; the net effect is the whole pie gets bigger, which is great. [New players] only serve to increase the volume of the dominant exchange," Sit added.

Indeed, Deribit CEO John Jansen told The Block that recent rival offerings have "substantially" increased the exchange's volumes and "breaking new volume records each month."

"Also, on a technological level, we are well ahead of the competition. For example, we are still the only platform offering real-time risk-based portfolio margining," said Jansen.

Some market experts, on the other hand, believe that Deribit's market share could decline as new players join in.

'Deribit's market share will decrease'

"With plenty of room for the options market to grow overall, it's natural Deribit's market share will decrease over time as competition increases, similar to what we have seen on the futures side with BitMEX," Emmanuel Goh, co-founder and CEO of Skew, told The Block. "A potentially decreasing market share doesn't mean they won't be able to keep doing well as overall volumes grow steadily," Goh added.

BitMEX's market share has indeed declined over a period of time, but it remains the dominant player in the futures market.

Source: Skew, The Block Research

Interestingly, BitMEX was also planning to launch options trading, but it appears to have put its plans on hold for now.

Last month, Arthur Hayes, co-founder and CEO of BitMEX, wrote in a blog post that crypto volatility is "very high," and the higher the volatility, the more expensive the call or put option is. "Therefore, option buyers, the speculators, must post high amounts of capital to obtain convex trades. In order to be cheaper than the BitMEX XBTUSD perpetual swap, the most liquid crypto derivatives product, the premium must be less than 1%. That is not possible when the underlying asset has such a high realised volatility," Hayes said at the time.

He also believes that the crypto options space is still "pretty illiquid." Hayes, however, indicated in another blog post earlier this month that BitMEX could re-evaluate options offering plans before the summer holidays.

Richard Rosenblum, co-founder of crypto trading firm GSR, told The Block that there is "room for more winners" in the space aside from Deribit, given the broad range of global market participants, from retail to institutional.

"Options have been the fastest-growing product segment of the crypto market in 2019, with the trajectory of volumes likely to accelerate in 2020, there are vast opportunities in this area and still plenty of demand to expand the market within crypto, even without further growth of the asset class," said Rosenblum.

Deribit's Jansen shared a similar view. "The crypto options market is still very underdeveloped and should increase at least 10-fold from where it is now in the next few years," he told The Block, adding: "So anything that helps expose bitcoin options to the public will lead to increased volumes on Deribit."

Jansen also acknowledged that competition is "always inevitable," but "desirable in general." "We will continue to work hard on new functions and capacity/performance improvements to stay ahead of the game," he concluded.

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