Crypto Options: Is Now the Window to Enter?

Author: Vaidik Mandloi; Source: TokenDispatch; Compiled by: Shaw, Jinse Finance

Options products in the crypto market have existed for a long time, but few people used them in the past. Deribit launched its options business in 2016, and Binance launched options at the same time as perpetual contracts; DeFi in 2021 even spawned a whole generation of options vault products, with a peak total locked value of about $500 million. However, from Ribbon Finance to Friktion and Knox, these products all gradually lost funds and disappeared. The reason is that perpetual contracts are simpler to operate and more capital efficient, which can just meet the leverage effect that ordinary users want.

Currently, **options have suddenly become hot again!** Coinbase just acquired Deribit, and within just a few months of its Nasdaq-listed IBIT options launch, its open interest surpassed Deribit's total open interest. For the first time ever, crypto options open interest exceeded crypto futures open interest.

Therefore, I intend to delve deeper into what exactly caused this sudden change. What is the real shift right now? Is this truly a turning point for crypto options?

Therefore, I intend to investigate further to determine what exactly caused this sudden change. What is the real shift right now? Is this truly a turning point for crypto options?

Why are perpetual contracts sweeping the market?

In the early days of the crypto industry, perpetual contracts quietly solved a problem that options had always struggled with. They consolidated the full complexity of derivatives into a single trading market for each asset. This means all liquidity is pooled in a single pool, rather than scattered across hundreds of combinations with different strike prices and expiration dates, each with limited order book depth.

In the illiquid crypto market of 2017 and 2018, ordinary traders could establish leveraged long and short positions in Bitcoin without worrying about the impact of theta decay before Friday, which might affect their positions, which strike price to choose, or how various Greek values ​​might change overnight. The reason perpetual contracts now have an annual trading volume exceeding $90 trillion is that they offer ordinary users only one benefit from derivatives: leverage, while minimizing cognitive burden. However, in 2021, DeFi still attempted to make options work, leading to the creation of Decentralized Options Vaults (DOV). The logic is that ordinary users deposit ETH or BTC into a vault; the vault then sells option contracts to market makers, with users earning option premiums as their profit. Protocols like Ribbon Finance, Friktion, and Knox are built on this model. The problem with this model is that each vault requires full collateral, directly eliminating the leverage advantage and resulting in extremely poor capital efficiency compared to perpetual contracts. Ultimately, the fate of DOV was determined by a serious flaw in its option auction mechanism. All vaults execute option auctions every Friday afternoon to match Deribit's readily available Friday-expiring contracts. Because all vaults are trading at the same time and in the same direction, and the order size is largely predictable, market makers can anticipate the influx of cheap options into the market well in advance. Knowing that hundreds of millions of dollars worth of options will be dumped into the market every Friday at the same time, all you need to do is wait patiently and submit even lower bids. Paradigm analyzed the hourly implied volatility during Friday's auction period and found that the volatility during this period was consistently 4 volatility points lower than the weekly average. This means that vaults are systematically selling options at below-fair prices, and the institutional professional traders buying them are aware of the auction time down to the hour. Those depositors who thought they were getting a 15-20% annualized return, without even experiencing any in-the-money options expiring, have already lost approximately 5.35% annualized simply due to the pricing discrepancy. All the vaults in the crypto industry have chosen to concentrate their options selling at the least suitable time. This led to the resounding success of perpetual contracts, while options gradually became unpopular; this situation persisted until October 10, 2025. On that day, Bitcoin on Binance plummeted 12.6% within 10 minutes, with liquidations amounting to $19.37 billion, 87% of which were long positions. The trigger for this crash was that, during the period of extreme market volatility, the reference price used to trigger liquidations was lower than the actual spot and futures transaction prices, and the liquidation engine continuously triggered liquidations at prices below the true market value. Each round of liquidation further depresses market prices, triggering more liquidations and creating a self-reinforcing reflexive cycle until selling pressure is exhausted. On the Hyperliquid platform, $2.1 billion in liquidations occurred within 12 minutes; its automatic liquidation mechanism covered $304.5 million in actual losses, resulting in $704.6 million in asset losses, requiring approximately eight times the actual amount needed to maintain the system's solvency. This event has spurred a shift in industry discussions surrounding basis trading, one of the most common strategies employed by institutional participants in the crypto space. This strategy involves buying Bitcoin spot while simultaneously shorting Bitcoin perpetual contracts as a hedge, aiming to profit from funding rates while maintaining market neutrality. However, during the crash on October 10th, the automated liquidation systems of several exchanges forcibly closed out profitable short perpetual contracts in these trades, leaving traders suddenly holding unhedged long positions in the spot market amidst double-digit declines. Please note that these traders originally constructed delta-neutral positions to hedge against directional risk, but the exchange's own liquidation mechanism turned them into unhedged long positions at the worst possible moment. This also highlights a problem with perpetual contracts: **path dependence**. This is an inherent structural problem in the perpetual futures mechanism because the margin engine evaluates your position tick-by-tick (tick-by-quote), rather than settling on a fixed expiration date. Even if Bitcoin's closing price and opening price are exactly the same over the weekend, it won't matter; a 15% drop in the middle could wipe out your position. Put options completely eliminate this risk: you pay the option premium upfront, and your maximum loss is locked in from the moment you open the position, regardless of Bitcoin price fluctuations between opening and expiration. Following the October 10th crash, the industry infrastructure has iterated at an extremely rapid pace, suggesting we may have been waiting for a catalyst to drive the restructuring of the options market. Derive previously operated on an old-style pooled vault model, which it later completely abandoned, reconstructing itself based on a central limit order book, adding inquiry functionality and portfolio margin, allowing traders to hold perpetual contracts and options positions simultaneously under the same margin account. This is precisely the crucial shift that first-generation crypto options always lacked: traders can use margin from perpetual contract positions to provide collateral for options trading, eliminating the need to lock up funds separately for different instruments. This is the operating model that major traditional financial derivatives exchanges have used for decades. After the transformation, Derive's weekly trading volume reached a record high of $294 million, and open interest exceeded $1 billion. Meanwhile, Nasdaq launched IBIT options, employing a regulated central clearing mechanism. A central counterparty provides performance guarantees for each transaction, eliminating traders' concerns about the counterparty's ability to pay. Within just a few months of its launch, the product's open interest surpassed Deribit's total open interest, and Deribit's market share plummeted from over 90% to below 39%. The closest historical reference is the establishment of the Chicago Board Options Exchange (CBOE): Options clearing firms eliminated counterparty risk in stock options, while the Black-Scholes model provided a unified pricing language for the market. In just five years, stock options grew from an over-the-counter business facilitated by two banks via telephone to a pillar of modern finance; the crypto industry compressed most of this institutionalization process into a few months. Subsequently, Coinbase directly acquired Deribit, connecting this largest crypto options trading platform to the US regulatory system, providing US institutions with a familiar access channel to a market that had previously operated almost entirely offshore. This marked the beginning of the strongest development trend in crypto options history. However, the trading volume of on-chain options (i.e., options settled and cleared on the blockchain, rather than through traditional exchanges) still accounts for less than 1% of the total trading volume of all crypto options. The liquidity surge in this round almost entirely flowed to regulated, centrally cleared platforms like Nasdaq and Deribit, rather than DeFi protocols. In other words, this growth story largely unfolded within the mature institutional framework of traditional finance. Teams developing on-chain options products for ordinary users haven't achieved billion-dollar open interest in their mass-market offerings. Who are the counterparties? The on-chain options products currently accessible to ordinary users are essentially repackaged covered call strategies after upgrades to the underlying infrastructure. Users deposit Bitcoin or ETH into a vault, and the protocol sells call options to market makers using the user's tokens as the underlying asset, earning the option premium as profit. The product's marketing rhetoric is: "Earn passive income for your crypto assets that you were going to hold long-term anyway." Depositors are essentially selling volatility: in exchange for stable option premium income, they forgo all upward potential gains after the underlying asset price breaks through a certain price level; on the other hand, professional market makers buy this volatility, profiting from sharp price fluctuations. There are also products like Euphoria on the market with different design philosophies. Users click on the corresponding cell on the price-time grid; if Bitcoin falls into their predicted price range within five seconds, they earn a profit. This product is essentially a binary option spread product. The European Securities and Markets Authority banned the sale of such products to retail users in 2018; the Israeli parliament also unanimously passed a ban in 2017 with 51 votes. The FBI estimates that these products generate $10 billion in fraud cases globally each year. Euphoria has completed a $7.5 million funding round with over 100 investors, aiming to move these products to the blockchain. Traditional finance didn't wait for the emergence of the crypto industry to understand how to package volatility sellers' profits into yield products and offer them to ordinary investors. For years, derivatives-based ETFs have been employing this model in the stock market: selling covered call and put options on the stocks they hold, distributing the option premiums to investors as dividends. This category's assets under management have quietly grown to $147 billion. JPMorgan's JEPI and JEPQ are the two largest products, selling options on broad-based stock indices that have experienced a slow, long-term upward trend. Therefore, the gains investors receive are mostly limited by the potential upside, rather than losses on principal. But let's examine what happens when the same strategy is applied to highly volatile underlying assets. MSTY, a covered call ETF tracking MicroStrategy stock, boasts a rolling return of 244%. Ironically, however, its net asset value has fallen by 62% since its inception. A closer look at the source of these returns reveals that 98.54% of MSTY's dividends are classified as capital returns. This means the fund essentially returns investors' own principal, and investors are required to pay income tax on this portion of the funds. You'll see what appears to be monthly returns, but the underlying assets generating this cash flow are constantly shrinking. Furthermore, besides simply receiving your principal, you also have to pay taxes to the IRS. The MSTY case is significant because it reveals the consequences of applying volatility selling strategies to highly volatile underlying assets, and crypto assets are precisely the most volatile asset class upon which such products are based. A thorough understanding of this type of risk is precisely the key reason why crypto options are currently at an inflection point. This is because multiple driving factors are converging, far beyond simply optimizing the vault mechanism or beautifying the interface. The primary, and perhaps most important, driving factor is narrowing returns. In 2021, basis trading could achieve an annualized return of 25%. The strategy involved buying Bitcoin spot while simultaneously shorting perpetual contracts to earn funding fees. Now, the return on this strategy has plummeted to a mere 4.46%. The readily available returns that once fueled the growth of the crypto industry have dried up, and option premiums are one of the few remaining sources of intrinsic return with real economic value—traders pay real money, transferring their risk to you. When basis trading yielded an annualized return of 25%, no one needed to rely on options to generate profits. But now, with returns falling to 4.46%, the market is for the first time exhibiting a genuine economic motivation to price risk reasonably through options. The demand also comes from institutions that genuinely need to hedge their risk exposure, rather than ordinary retail investors seeking leverage. Secondly, in the FTX bankruptcy case, billions of dollars in open derivative positions were frozen in the bankruptcy asset pool. Traders' screens clearly showed profitable positions, yet they were unable to close them, with no recourse other than submitting claims and waiting for years. On-chain options, however, settle directly to user wallets, with collateral held in smart contracts verifiable on Etherscan, rather than relying entirely on exchange balance sheets. For institutional trading departments that suffered billions of dollars in losses due to this incident and have learned their lesson, migrating derivatives settlement on-chain is a pragmatic option that compliance departments can support. The third advantage is composability, which is the true differentiating advantage of on-chain options compared to traditional options. When option positions exist in the form of on-chain tokens, they can be integrated with all existing DeFi infrastructure. Covered call option positions can serve as collateral for lending protocols; developers can programmatically assemble single option legs into more new products and deliver them to users in a single transaction; the margin for a combination of perpetual contracts and options can be calculated on-chain in real time, rather than being processed overnight by clearinghouses. In 2021, with the Decentralized Options Vault (DOV) conducting Friday auctions, none of the above would have been possible; similarly, Nasdaq and Deribit platforms couldn't do it either, as their settlement architectures were not designed for open, permissionless composability from the outset. It's noteworthy that crypto is building capabilities that traditional derivatives infrastructure cannot replicate, rather than simply chasing existing functions in traditional finance. Since the beginning of 2024, Bitcoin options open interest has grown approximately tenfold, with Deribit and IBIT combined reaching approximately $80 billion. For the first time in crypto derivatives history, options open interest has surpassed futures open interest. This means that the total capital allocated to options exposure has exceeded the capital used for leveraged directional bets that have dominated crypto trading over the past decade. This is the turning point signal I want to emphasize: The infrastructure is operational, capital efficiency issues have been resolved, and multifaceted regulatory certainty is being implemented simultaneously; the market is voting with hundreds of billions of dollars.