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Despite being the worldâs most popular digital asset, Bitcoin is not the foundation of DeFi as we know it today. Smart-contract platforms like Ethereum have popularized non-custodial decentralized exchange, lending and borrowing, and similar primitives that would soon form the world of on-chain finance. While some projects like Stacks have attempted to take DeFi to Bitcoin, the two have been very distant relatives. Consequently, Bitcoin holders are left with very few on-chain products to trade, hedge, or speculate.
âBitcoin was the true original â it has been around the longest (since 2008) and has the largest market cap. It is what everybody comes to think of when they are asked about blockchain, cryptocurrency, or DLT worldwide,â Pelli Wang, Co-Founder of Bracket Labs, explains. âTherefore, it is the asset that everybody wants to trade and potentially want to hedge or speculate against.â
As the demand for Bitcoin grows, so too does the demand for Bitcoin-denominated financial products, including derivatives.
On centralized custodial exchanges like Deribit, professional traders use futures and options, popular tools for playing volatility and price changes, to make a profit. To bridge the gap to retail audiences, the popular crypto exchange Binance has expanded beyond traditional futures and options to offer range-bound trading, a new spin on options strategies. These strategies are packaged into simple products that enable retail audiences to use what was once reserved for the most sophisticated traders. With simple and easy-to-understand strategies, retail traders can play all kinds of market conditions tracking the price of Bitcoin without having to construct the strategies themselves.
In the DeFi realm, platforms like BracketX have taken a similar approach, allowing users to buy range-bound strategies around BTC without having to own the asset itself. On BracketX, products track the Bitcoin asset price using an oracle and enable users to buy one-click strategies for all volatility conditions, something that was not formerly possible. DeFi platforms like Bracket are also non-custodial, which lets traders stay in control of their assets without having to trust a centralized exchange.
In this article, we will explore how the DeFi market has evolved in the last year to support a growing demand for trading Bitcoin derivatives.
Overcoming Bitcoinâs Accessibility Barriers
As the original and most recognizable cryptocurrency, Bitcoin attracts traders from everywhere. The accessibility of Bitcoin trading poses notable impediments, including high prices and network transaction costs. Many potential users face capital constraints that prevent them from outright owning Bitcoin, while others encounter obstacles related to the transaction fees imposed on the Bitcoin network.
Pelli Wang, Co-Founder and COO of Bracket Labs has been at the forefront of the emergence of DeFi and Bitcoin while working at ConsenSys Capital and her Web3 strategic advisory firm, DeerCreek. Now with Bracket Labs, Pelli, and her teamââwhich includes senior leadership experience from crypto and traditional finance backgrounds at D.E Shaw, Merrill Lynch, Barclays, and Bloombergââ are on a mission to make derivatives and options products easier and simpler to use completely on-chain.
âWe know that the high price of Bitcoin can seem daunting to new users, where they might not have enough capital to own BTC outright or use the BTC network to transact (high gas costs),â Pelli adds. âHowever, they might want to express their view of BTC if itâs trending directionally (moving up or down) or moving sideways. Using an L2 makes it much easier and cheaper to transact for all users of our product.â
At Bracket Labs, Pelli and the team spent years working to find the solution to these challenges and built a product to capitalize on Layer 2 scaling solutions, streamline the process, and reduce user transaction costs. This way, users can effectively express their market views on Bitcoin's direction and volatility, whether upward, downward, or sideways, without extensive capital requirements or burdensome transaction expenses.
Bitcoin's dominant position within the cryptocurrency market is mirrored in the popularity of Bitcoin markets on the BracketX platform. With its extensive trading history and substantial market capitalization, Bitcoin often becomes the preferred asset for those seeking to hedge or speculate.
âSince we launched back in Dec 2022, we have seen that BTC markets for our product, Bracket, Channel and Epoch have had the largest activity and trading activity even compared with ETH,â Pelli says.
Trading activities related to Bitcoin markets on the BracketX platform have showcased significant growth, surpassing the trading volumes of other assets available.
A Solution to Bitcoin DeFi: Synthetic Derivatives
The development of on-chain derivatives has opened a new door to asset creation in Decentralized Finance. From liquid staking derivatives to synthetic derivatives, assets like wrapped Bitcoin or staked Ethereum provide a base for new markets.
âIn order to create a âDeFiâ market for Bitcoin, it either needs to be created synthetically (i.e., using an oracle to track the price of Bitcoin to create a perpetual), or it needs to be wrapped into an ERC-20 token and used within existing protocols (i.e., for swaps, lending and borrowing, etc.),â Pelli adds.
Protocols like Opyn, DOPEX, Ribbon, and Thetanuts have all created DeFi structured options and or perpetual trading products. These solutions are possible because of price oracles like Chainlink, which track the price of popular assets and allow for synthetic products.
âFor example, our team recognized the need for a DeFi opportunity tailored to Bitcoin and has adopted a synthetic approach to address this challenge,â says Pelli. âWith all the limitations of utilizing Bitcoin directly within existing DeFi protocols, we aim to harness the power of highly efficient decentralized indexes on The Graph to create synthetic derivatives that mirror the price of Bitcoin and its other assets.â
By leveraging synthetic derivatives, traders are exposed to Bitcoin through DeFi strategies without needing to own the asset. This unique development boosts the accessibility of Bitcoin and opens a unique use case in DeFi. Even more, this innovative approach is done completely on-chain and boosts the creation of diverse products optimized for various volatility market conditions.
âWe decided to take the synthetic route. We know that Bitcoin is the most actively traded asset. Still, in order to create different products suitable for different volatility markets, we needed to use an oracle to create a synthetic derivative,â Pelli continues.
So What Are Various Bitcoin Trading Strategies Using Range-Bound Products?
There are several trading strategies to choose from that cover high volatility markets, low volatility markets, or choppy sideways conditions. Through the use of synthetic derivatives, traders have the opportunity to implement these strategies for Bitcoin.
âCurrently, there are two popular strategies in todayâs market. If a trader has a view on the overall direction of the market, he or she can be long or short an asset,â explains Pelli. âIf he is long, he can outright own the asset, or he can compound it by staking it or lending it out (and generate a small % yield). If she is short, she can use a perp or sell a put option.â
Options traders not only have access to directional BTC exposure through synthetic products, but they can also effectively play sideways trending markets by using different range-bound products available through Binance or Bracket Labs.
However, many of these strategies are not available for Bitcoin on any traditional market, so you need to use a synthetic strategy like those offered on BracketX. If you have a view of long or short BTC, you can buy a long or short Bracket. If you think the market is trending sideways, you can buy a Channel and make a leveraged return commensurate with the time you remain in the range.
âGiven Bitcoin's prominence within the cryptocurrency market, the substantial trading activity across BracketX is a testament to the demand for Bitcoin-centric trading solutions as traders engage in diverse strategies, like long, short, or volatility positions using Channels,â Pelli says.â We want to build products that pioneer options for Bitcoin trading within the DeFi landscape.â
Through the facilitation of Bitcoin exposure and trading activities without necessitating direct ownership of the asset itself, we, as an industry, can improve accessibility and reduce barriers for users. As DeFi and TradFi merge, platforms like BracketX can play a pivotal role in bridging the gap between Bitcoin and the DeFi ecosystem.
Author Bio
Born and raised in the East Bay of California, Kyle has studied and worked on three continents and lived in seven countries. A lover of language, Kyle has worked in translation, interpretation, machine language learning, and journalism. Find his Crypto Twitter shenanigans at: @CryptoQuile.
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