PowerTrade's Tom Howard Expects Crypto Options to Grow to Half of Futures Volume

Ashton Addison: Why did PowerTrade focus on options and derivatives in crypto?▶ 00:21

Tom Howard: When you look at the traditional options market in equities, trading volume is multiples higher than spot and roughly half the volume of futures. In crypto, 2017 and before was all about spot trading. In 2018 people got turned on to futures and perps, and that market exploded. In March or April, I believe, there was about two trillion dollars of futures volume, more than ten times the spot market. Options are still undiscovered in crypto, and they traded about 30 billion dollars in March. We expect that to grow to about half the size of the futures market, as it is in equities. We identified in early 2020 that options is the final frontier of financial primitives in crypto, so we started PowerTrade to bring the options market to crypto.

Ashton: For traders who only buy spot, what makes options different from buying bitcoin or major coins?▶ 02:46

Tom: Futures are mostly used to take a high-conviction trade with leverage. Instead of buying a tenth of a bitcoin with your money, you can put it on a futures exchange and get exposure to a whole bitcoin for a tenth of the price. The downside is liquidations. If you lose your initial principal you're out, and you have to watch the market non-stop, which is very stressful. Options are different. You're buying the right to buy bitcoin at a certain price by a certain expiration date. If you think bitcoin is going to 100k by December, you could buy a contract today that gives you the right to buy at 60,000 until the end of December. If it goes to a hundred thousand, you've got a 40,000 dollar profit. I'd have to check the price, but my guess is that contract would go for a couple of thousand dollars. You get leveraged payoffs, but if the price goes down before it goes up, you don't have to worry about being liquidated. You just wait until it goes up and then sell your option contract.

Ashton: Are there more conservative ways to use options?▶ 11:17

Tom: The more you learn about options, the more you learn about risk management. Buying a call to get a leveraged payoff is one example, but there are more conservative strategies. Say you hold a bitcoin and you don't think it will reach 100k by the end of September. You can sell a 100k call option and collect a premium, so you earn a percentage on your bitcoin. If it does go above 100k, the bitcoin you hold offsets the payout you'd owe. That's a covered call, and it's a pretty popular way of earning more on your bitcoin if you want to be a more conservative trader.

Ashton: How long has the team been working on this, and what is live today?▶ 06:40

Tom: We started about a year ago and have been live and improving the platform for the last couple of months. We've just released ETH options to go with bitcoin options. We also have what's called a SPAN or folio margin system: the better you manage your risk, the less capital you need to open trades, which is really useful for more advanced strategies. We're live on iOS and Android, and you can sign up for early access to the beta. A bitcoin contract is priced in bitcoin. Soon we'll roll out a full suite of futures, perps and spot markets to go along with our options markets.

Ashton: What is capital efficiency, and why does it matter to traders?▶ 08:26

Tom: Imagine you have a profitable strategy making 10% a week, but to execute it you need half your money on another exchange to hedge. Other options platforms don't have all the products, so if you need to hedge bitcoin price moves you have to do it elsewhere. That splits your capital in half, so a 10% weekly profit is effectively 5%. The more you can do in one place, the more trading credit you have on margin and the higher the reward for each dollar on the exchange. We're bringing options, futures, perps and spot together on PowerTrade, so you'll be able to use spot or futures positions as collateral to trade options. That's capital efficiency: you get more ROI per dollar on a single platform.

Ashton: How deep is the range of options products at the moment?▶ 10:24

Tom: We're still pretty new, so right now it's vanilla bitcoin and ETH options. That's pretty straightforward and similar to what you'd find in equities markets. We plan to roll out more options markets. We know things like Doge are popular and there's interest in options on it, so look out for that.

Ashton: What does the PowerTrade token do, and does it create a sustainable ecosystem?▶ 13:30

Tom: The token is called PowerTrade Fuel, or FUEL. It's a DAO that acts as a liquidation reserve for PowerTrade. An exchange like BitMEX has an insurance fund worth a few billion dollars that covers the bill if liquidations bankrupt traders, so the winners aren't left holding the bag. It's a good idea, but there's a conflict of interest. Who's in charge of the fund, who decides whether it gets paid out, and what happens if there's too much money in it? The FUEL DAO is the answer to those problems. Users who go bankrupt because they couldn't be liquidated fast enough are covered from the reserve, and it's all managed by the DAO. In exchange, we pay 25 percent of our trading fees into the DAO's treasury. Through liquidity mining incentives, we're getting the token into the hands of users who understand risk management, because they're the ones affected if something goes wrong. Token holders decide how the reserve is used and how to cover the swan events that happen in crypto.

Ashton: What is in store for PowerTrade in the coming months and into next year?▶ 16:42

Tom: I don't want to tilt our hand too much, but the big things already public are perps, futures and spot markets, rolling out quite soon. We'll be the first options exchange to have multi-collateral spot, futures, perps and options all in one place, all on portfolio margin together. That gives you a capital efficiency boost that just hasn't existed in crypto yet. I've also been a DeFi geek for quite a while, and I found a DeFi community back in 2019, way before DeFi was popular. We're working on things I think will be pretty interesting to the DeFi community.