For the BTC naysayers, would you consider BTC options?Submitted by Duane Vick on Thu, 12/26/2013 - 14:11
I understand the concern that many have about the bottom falling out on bitcoin. It's not an impossibility, just an improbability. There's an element of risk to buying a bitcoin for $800. It could go down in value real fast, right down to $0. However, it is difficult to ignore the over 5000% gain in a single year that has been demonstrated over the last 12-13 months. With that said, I propose an option:
Trading options contracts on Bitcoin.
If you don't understand options, they work like this. You can buy a call option which gives you the option to buy Bitcoin at a specified price. You aren't required to buy it at that price but you have that option. Obviously, if Bitcoins were trading on an exchange for less than the price listed in the option, the contract is worthless. However, if Bitcoins were trading above that option price, you could buy it at that price and sell it on an exchange for the then current price. Contracts expire after a certain time. Each contract has its own price or premium, set by market demand, duration of contract (more time for a profitable condition to exist), price of the underlying asset (Bitcoin).
Here's an example:
You buy a contract to buy a Bitcoin at a price of $1000, expiring within 6 months. The premium to purchase the contract is $100 in this example. Now, with Bitcoin floating around $750, this contract would be worthless. If Bitcoin never went above $1000 in 6 months, the contract would be worthless and you would be out $100. However, if in that 6 months time, the price of Bitcoin went up to $2000, you could sell that contract to someone else for a $1000 premium, maybe even more if there was plenty of time left in that contract before expiration. You make 10x profit without having to own a bitcoin. If you bought the bitcoin instead, you would only make about $1250 instead and been at risk of a greater loss.