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Bitcoin Options Purchased for $1 Million Will Soon Be Worthless (bloomberg.com)

Posted by EditorDavid on from the buy-high-sell-low dept.

"The biggest-ever bet on Bitcoin options is about to expire worthless," reports Bloomberg: Purchased for almost $1 million on LedgerX's trading platform just days after Bitcoin peaked a year ago, the call options have a strike price of $50,000 and an expiry date of Dec. 28, 2018. For the contracts to retain any value at expiry, Bitcoin would need to rally more than 1,400 percent.

The options' almost certain wipeout is a less-than-ideal outcome for the buyer, but it may not be quite as bad as it seems. Ari Paul, a cryptocurrency fund manager at BlockTower Capital, has indicated that he bought the options while simultaneously selling some of his fund's Bitcoin holdings... He later tweeted that the trade -- selling some of his Bitcoin holdings while buying the call options -- was profitable.

31 of 59 comments (clear)

  1. No more Bitcoin articles please by bkmoore · · Score: 5, Insightful

    Please /. no more articles about Bitcoin market movements. This has nothing to do with science, technology, or news for nerds that matters. No matter where an asset moves, up, down, sideways, - unexercised options are always worthless.

    1. Re:No more Bitcoin articles please by hackertourist · · Score: 1

      Completely agree. Tagged this story "nomorebitcoinstories".

    2. Re:No more Bitcoin articles please by YttriumOxide · · Score: 3, Insightful

      While I agree that stories about bitcoin market movements aren't appropriate for slashdot, real news about bitcoin (the technology) always should be.

      If you disagree, tell me how "a game theory based system for ensuring trust by writing entries to a global decentralised ledger built around a proof of work system that can be modelled more effectively using equations more at home with a physicist than an economist or computer scientist (specifically those regarding entropy and information transmission/density)" isn't "news for nerds".

      --
      My book about LSD and Self-Discovery
      Also on facebook as: DroppingAcidDaleBewan
    3. Re:No more Bitcoin articles please by Can'tNot · · Score: 1

      /. has been reporting incessently for years on bitcoin evangelicals. I agree that this was a mistake, just helping to fuel something very very stupid, but now is not the time to stop. If you're going to tell a story, even a stupid story, there's some responsibility to finish it. That's especially true when people are betting their savings on this - the fall of bitcoin needs to be publicized just as widely as its stupid stupid rise.

    4. Re:No more Bitcoin articles please by bkmoore · · Score: 1

      Imho Bitcoin, block chain, etc. are all just a digital version of the old pyramid scheme because both require exponential growth to succeed, create an illusion of creating wealth, and their participants are completely emotional in defending their legitimacy and will throw out 10000 excuses why the powers that be don't want Bitcoin, etc to succeed or how it will "change everything". Bitcoin mining produces nothing of value and consumes valuable resources; the 21st century equivalent of spinning hay into gold. But even if blockchain did manage to produce a viable alternative to cash, it doesn't solve any problem that most people have. If you work for a living, you're getting paid in Dollars, Euros, Pesos, etc. You still have to convert that to a digital currency in order to complete a transaction in that currency. Why bother, as most people take the path of least resistance and will just buy in their Dollars, etc. International transactions, the same, there are far more efficient ways to convert Dollars to Euros, etc. than to go Dollar -> BTC -> Euro. At least when I go direct Dollar to Euro, I know what I'm getting on the other side. With BTC in the middle, it's a crap shoot and the transaction cost is much higher.

  2. Old saying... by Anonymous Coward · · Score: 1

    Fools and their money are soon parted.

    1. Re:Old saying... by magarity · · Score: 1

      Wrong...

      selling some of his Bitcoin holdings while buying the call options

      This kind of hedging strategy is EXACTLY what call and put options are for. Repeat after me: Options are a hedging strategy and not an investment by themselves.

      If this was a story about someone who had sunk all their savings into options as an "investment" then yes, it would be a fool-parted-from-money story, but it isn't.

  3. Re:Were items like this the real reason for the dr by ShanghaiBill · · Score: 1

    Is someone gaming the market here

    If they were, how would they be profiting from it?

    ... in the same way the stock market sometimes fluctuates in suspicious manners?

    When shown randomness, people will perceive patterns where none exist.

    Actual suspicious stock movements are usually caused by trading on insider information. How would that work with bitcoin, where information is public and there is no "inside"?

  4. Gamblers... by ChatHuant · · Score: 3, Funny

    He later tweeted that the trade -- selling some of his Bitcoin holdings while buying the call options -- was profitable.

    I noticed that when you ask consistently losing gamblers how they're doing, they'll very often say they're about even, or maybe a little up...

    1. Re:Gamblers... by ediron2 · · Score: 3, Informative

      (sighs... meh, might as well at least fire off a couple rounds, even if I'm not willing to die on this hill):
      If a traded commodity is at 17000, and you're not sure if it will climb or fall, numerous contracts are possible.
      This guy sold X in Bitcoin (BTC), and bought Y in options.
      If BTC values grew above some amount, Y options would go 'kaching' far in excess of the 'unrealized gain' of X bitcoin he sold early.
      If BTC shrank below some amount, his X sold at 17000 look brilliant, and his profit on them is far in excess of the loss of his options.
      And if BTC sat idle at that position, he'd lose the $1M, not feel clever for cashing out early, not feel clever for the option, but be armed with new knowledge of BTC having endured umpteen months of relative stability.... yeah, that was never going to happen.

      And let's face it, if he sold BTC anywhere from 8000 to 17000 and felt the urge to buy $1M of options, he likely cashed out more than a thousand BTC. Several million in value. Since options contracts cost pennies on the dollar, this $1M contract was likely struck so he'd have tens of millions of profit waiting if BTC had doubled again.

      Bracketing like this is an everyday thing for hedge funds. A multinational agricultural company I worked in used to do so each year on fuel prices, so they knew their price of tractor and transport fuel would be between $1.75 and $2.00 per gallon. Airlines buy options when they see possibilities of fuel price shifts. Speculators in currencies set up options that either pay on high volatility, or limit their profit/loss to a narrow percentage. Quants do trades based on trends they think only they see, and sometimes get a bracket in case they're wrong.

  5. It's called a hedge. by Anonymous Coward · · Score: 5, Informative

    Nothing to see here. Options are often bought to guard an opposite investment. If the asset moves in the unexpected direction, the option limits the damage. In this case the asset moved in the expected direction and the option wasn't exercised.

  6. This is trivia, not news by perpenso · · Score: 2

    An article about a single options trade? Really? Has slashdot become a trivia site?

    I get the interest in cryptocurrency. The field of full of nerd related news and interesting tech, psychology and social impact. But this, its just: here's the biggest bet gone wrong. Trivia.

  7. logical fallacy by gravewax · · Score: 1

    but it may not be quite as bad as it seems.

    FFS, just because you also made some other transactions that weren't flea bitten dogs doesn't make this transaction any better.

    1. Re: logical fallacy by Wycliffe · · Score: 1

      Hedging is common. The buyer of this option likely expected that it would expire worthless when he bought it but wanted an insurance policy in case bitcoin really did take off.

    2. Re:logical fallacy by sheetsda · · Score: 5, Informative

      Speaking as someone who does a bit of trading, this actually makes complete sense and was a prudent strategy. There exist quite a few strategies in trading that require purchasing options you expect to expire worthless and I can explain what we're seeing here without even getting into anything exotic:

      He stated explicitly that he sold bitcoin at the same point as purchasing these options. That he sold means he was expecting the price to drop. One move you can make to cash when you expect a price drop is to borrow shares, sell them, and then replace them after the price drops. This called selling short (I'm actually holding such a position in my portfolio right now). If you're wrong when you sell short, you cash out at a loss - and if bitcoin had kept skyrocketing that could have been a devastating loss - potentially unlimited, in fact. If you buy call options, however, your loss is capped because replacing the shares you sold cannot cost you more than the strike price.

    3. Re:logical fallacy by epine · · Score: 1

      All that is true, but normally you aren't hedging into a tulip euphoria where you pony up seven figures for a strike price that winds up 14x out of the strike zone, though results may vary in Japan, where Godzilla is DH eligible.

    4. Re:logical fallacy by sheetsda · · Score: 1

      I'm not sure I follow the flowery language (pun intended). A 7 figure insurance policy when you're working at an 8 to 9 figure scale is completely reasonable.

    5. Re: logical fallacy by Wycliffe · · Score: 1

      This wasn't hedging, he had sold the initial bitcoin, he left an open position with options. No Hedging, that isn't hedging It is gambling.

      Apparently you don't understand what hedging is. He sold his bitcoin and with some of the profits bought the option to buy them back in the future if they continued to go up. This is pretty much the definition of hedging. Basically it's a form of having your cake and eating it too. In this case he set himself up to get profit while selling while also having the potential to have a profit like he never sold.

  8. LOL by Hallux-F-Sinister · · Score: 2

    "Buy high, sell low, that's how you do it... that's... oh shit! Wait... we did it BACKWARDS! NOOOOOoooo!"

    As Rick "Gov. Goodhair" Perry famously put it, "oops."

    --
    Our reign has gone on long enough. Indeed. Summon the meteors.
    1. Re:LOL by Anonymous Coward · · Score: 1

      I am sure he made a very tidy profit. He sold Bitcoin near the all time high, and hedged against a further price hike by buying cheap call options just in case Bitcoin was about to go to the moon. The hedge turned out to be unnecessary, as hedges often do if you trade well, but his bet was correct.

  9. Re:Were items like this the real reason for the dr by ShanghaiBill · · Score: 1

    There's tons of insider trading in the Bitcoin world and the market is gamed six ways to Sunday.

    Can you explain how that is possible, even in theory?

    The code is open. The blockchain is open. So who is the "insider"?

    It is common to believe there are vast conspiracies behind every problem in the world. But most are caused by plain ol' stupidity and incompetence.

  10. Re: Were items like this the real reason for the d by ShanghaiBill · · Score: 2

    Sell millions of dollars worth of BTC options and then depress the price to ensure they're worthless?

    How does one "depress the price" without losing money?

    The collective value of all bitcoins declined by $200B in the past year.

    Are you seriously claiming that someone dumped enough bitcoins to depress the market by $200B in order to make $0.001B?

    The Flat Earth Society has a more plausible theory than that.

  11. Re:Were items like this the real reason for the dr by Anonymous Coward · · Score: 1

    The price of Bitcoin isn't determined by Open Source code. It is influenced by many decisions that you and I will not learn about before the trades are already locked in. For example decisions about limiting Bitcoin use and trade in China, decisions by large mining pools to accept or reject protocol changes, decisions by large companies to start accepting Bitcoin or to phase out Bitcoin payments, and so on. The market is easily gamed because Bitcoin is very unevenly distributed and there is next to no oversight. Unsurprisingly the people who make decisions about the protocol are also close to people who got in very early and still hold the vast majority of all Bitcoin.

  12. Good by Anonymous Coward · · Score: 1

    It should never have been traded in the first place. it should have remained a digital micro-payment platform.

  13. That explains the sudden price drop by Anonymous Coward · · Score: 1

    Well if options are going to expire at the end of the year that explains the sudden price drops. It will pick in 2019 after "investors'" money (aka options) have been lost.

  14. Re:Were items like this the real reason for the dr by NicBenjamin · · Score: 4, Informative

    It's possible that someone is gaming the market unethically, but this is an example of how you game the market ethically.

    The dude sold a bunch of BTC around $20k to lock in the gains, and then because he did not want to be out-of-luck if it kept going up he bought the option to buy back in at $20k. If the price is less then $20k the option is worthless, so the person who is on the other side of the contract got a free $50k. If BTC continued to increase that person could be in trouble.

    It's called "hedging," and it is clearly gaming the system, but the only people who can be screwed are the people involved in the actual contract. Pretty much the only way it could affect the market is if the price went above that $20k strike price and the dude called the option by forcing the other side to sell BTC to him at $20k, because they'd have to get those BTC somewhere.

  15. Glad I'm in Dogecoin by LynnwoodRooster · · Score: 1

    It's still at one Dogecoin is worth one Dogecoin! Inflation AND crash-proof!

    --
    Browsing at +1 - no ACs, I ignore their posts. So refreshing!
  16. Strange Coincidence? by dohzer · · Score: 1

    So the options will soon be worth the same as Bitcoin?

  17. Re:Were items like this the real reason for the dr by TheRaven64 · · Score: 1

    Bitcoin can handle something like 7 transactions per second on the public ledger. The vast majority of trades are not on the ledger, they're derivatives. An exchange owns N bitcoins and holds them for their customers. Customers can trade them by simply updating the exchange's record of who it will pay the bitcoins to. If someone wishes to claim their bitcoins, the exchange will transfer them to that person's bitcoin wallet, though with the speed of processing that may take a day or two to actually go through (and will incur a transaction processing cost from the blockchain).

    Because exchanges are unregulated derivatives markets, they can sell options and participate in all sorts of financial shenanigans that real financial markets have heavily regulated for around a century, without any oversight.

    --
    I am TheRaven on Soylent News
  18. My money will make money someday by AndyKron · · Score: 1

    I'm sitting pretty good right now with my investment in quatloos.

  19. Re: Were items like this the real reason for the by Shaitan · · Score: 1

    "You think a competing hedge fund wouldn't exploit this for all its worth?"

    Of course they did, but their goal isn't to bankrupt each other, they exploit it to their own profit not piss their funds away against the other hedge fund. Also the top players are so interdependent and incestuous they are basically all one team. The 60% who lose aren't the banks and hedge funds, they are the suckers trying to play the market honestly.

    "So they subsidised the price of heaps of shares to new investors at discount prices, to ease losses on short positions?"

    Seriously? This isn't a conspiracy theory or even a secret. It is public knowledge.

    They kick started downward cycles alongside bogus analysis. They made profits on each wave as the natural market tried to push the price up in response to overwhelming positive news and they'd smack it down. Which is a net zero because the price is offset by a reduction in the negative balance on their shorts. When the price went down rather than up on fantastic news it would trigger a sell off by other people, and these losses are where the gains come from. Put the cherry on top with some paid friendly analysis saying AMD is overpriced. This went on over and over again throughout the entire AMD climb and kept the yo-yo in play for quite awhile between $10-16 and before that around $5.