Deribit is a Bitcoin Options Trailblazer

Deribit, the ‘deri’ short for derivatives, the ‘bit’ short for bitcoin, is a futures and options trading platform utilizing bitcoin exclusively for depositing, withdrawals and trade collateralization. Their futures offerings are open to anyone regardless of location, and traders will enjoy tight spreads, leverages of 10:1, and volumes that, while not yet challenging bitmex for top dog, are definitely adequate for trading, and rapidly growing. In August 2018 Deribit launched a new perpetual swap instrument, which tracks the spot market for bitcoin and offers leverage of up to 100:1. Currently in beta, the Deribit team plans to release ethereum and bch perpetuals as well.

The release of the perpetual swap has really changed the picture for Deribit. Their volumes have increased by 50%, and their leveraged spot market is now one of the most liquid in the market – and for US traders, it is tops.

Deribit could also emerge as a monster in the nascent crypto options market. For those seeking a platform to day trade options, Deribit’s option volume is not there yet, though they are the closest. If, however, you are looking to more actively manage and hedge your existing bitcoin portfolio, Deribit’s option platform offers a few interesting new tools. And should market demand for bitcoin options ever materialize, we would expect Deribit to emerge as a market leader. When you sign up with bitreview, Deribit offers a 10% fee discount for your first 6 months of trading!

Opening an account with Deribit

Registration requires only an email, and new users can begin trading after six network confirmations. In other words, depending on your reading speed, and assuming you do not need to buy bitcoin, you should be able to finish this review and begin trading deribit derivatives within 10 to 15 minutes.

Derivative trading at Deribit

Deribit offers monthly and quarterly expirations on both options and futures, as well as a new “perpetual swap”, modeled on bitmex. The perpetual swap is pegged to the spot market using a premium, applied every eight hours, that charges a fee to ensure trading stays relatively close to the underlying instrument. For instance, if deribit bitcoin perpetuals are trading higher than the underlying index, then longs will pay the shorts a certain amount.

If your position is liquidated, a higher fee is charged, the majority of which is used to fund an insurance fund. In the event that options smaller than 1 btc are being traded fees are capped at a generous 20% of the option price. In other words, really try to trade full contracts. Note that a negative fee indicates a rebate.

Bid/ask spreads on the futures side are usually quite low, generally between $1-$2 per bitcoin, a good deal less (down to a penny) during busy trading periods. Twenty-four hour trading volume on the futures side comes in around 500-1000 bitcoin and can triple when the market is volatile. Not the best in the market, but adequate.

The bitcoin options market has a very low trading volume of around 70 bitcoin daily. Strike prices are wide – 100 point increments – to be expected considering the trading volume.

Trading Futures at Deribit

Each futures contract is worth $10, and the leverage is set automatically at 10:1 on the buy side, a bit lower on the sell side. The mid-market rate is determined by a Deribit index of five different exchanges, with the outliers on the high and low side dismissed, and the average of the middle three used. The exchange prices are shown at the footer for reference.

The expiration price is determined by an average of the Deribit index, taken every 6 seconds for the 30 minutes prior to settlement – or from 7:30 until the 8:00am UCT settlement.

A market order is placed simply by outbidding the order book, which will incur a makers fee. To minimize fees, the “post only” command at the bottom of the trade slip does not instantly match orders, and your bid/ask will enter the order book and incur the lower maker fee.

Once an order has been placed, it will move to positions or open orders. From the open orders tab you may edit or cancel; note that the interface offers only a breakdown of margin requirements, profit/loss and a liquidation point; you may not add order protections like stop loss / profit taking, nor may you close the position. Closing open positions must be done from the trade slip, ditto setting stop loss / take profit instruction (i.e. placing a sell limit order when you have an open long, and vice versa), which is less comfortable and more prone to accident for the beginning trader. Advanced instruction like trailing stops are not available.

Bitcoin Options at Deribit

There is an issue with deribit’s options volume; however, this seems to be more of a macro issue in the wider market. For whatever reason, demand for options trading has not really picked up; deribit is currently one of a very few options platforms, and is well positioned should demand for bitcoin option trading increase.

Deribit is the market maker for its options exchange, meaning it sets the bid/ask on the different strikes, which are set $100 apart. Even with the low volumes, there are some interesting opportunities for bitcoin traders – for instance, some might find the bids on out-of-money call options quite attractive.

Note that deribit offers European style options, meaning options may only be exercised at expiration, which happens automatically.

Margin Requirements

Accounts are set with an initial margin requirement of 10% and are required to maintain a margin of 3% of a trader’s position. The margin balance is an account of all margin available in the account – the equity of your entire account, which is all considered usable margin. If the account margin balance – the cash balance combined with the profit/loss on futures’ positions – falls beneath the maintenance margin requirement, the deribit risk engine will begin a process of auto-liquidation. Auto-liquidation closes positions until the account is back in equilibrium, i.e. the margin balance again surpasses the maintenance requirement.

Deribit offers sub accounts as well, which ring fences account equity behind certain trades. This can help active traders manage risk, as position downsides are limited to the equity held in each sub account rather than eating into an account’s entire equity.

Insurance fund

Deribit funds a 25 bitcoin insurance account for protection against position bankruptcies. This is Deribit’s attempt to avoid socialized losses or other less than optimal alternatives like Bitmex’s auto-deleveraging. In their two years of operation, Deribit has not yet needed to dip into the insurance fund, so good on them.

Higher Volume Alternatives:

If you are ok to settle trades in USD, a number of options for futures trading should be opening shortly.  The best exchange settled in bitcoin is pretty universally thought to be bitmex,  However, be forewarned that they IP block US residents.

Bottom Line

As is the case with many innovative businesses, Deribit exists due to CEO John Jansen’s frustration with the lack of cryptocurrency option trading platforms. The product is quite good – and also a bit ahead of the market. If bitcoin options trading eventually takes off, expect Deribit to be a market leader. As it stands, there are some interesting money-making opportunities using options instruments. Additionally, the futures platform has adequate liquidity and is open to traders of any nationality or location.