Confronting the Influence of Retail Giants and Overcoming Obstacles in the Options Trading Arena

Beginning in July 2021 and continuing until June 2022, the retail sector of the cryptocurrency options market experienced periods of rapid growth. Unfortunately, this was succeeded by a substantial reduction in total value locked (TVL) within options vaults and diminished overall returns amidst significant realized volatility spells. The systematic short volatility strategies that options and structured products vaults implemented have not met positive reception from the retail majority.

Source: defillama.com/protocols/Options

Options and structured financial products endure as intricately complex, demanding a close-to-active management approach. The quest for convexity grows by the day, with Same Day Expiry (0DTE) options regaining prominence among retail traders. Meanwhile, institutions are quietly laying the groundwork for non-retail players to participate, with structured products that incorporate a range of cryptocurrency returns and customizable features.

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The longstanding challenge with the evolution of various cryptocurrency instruments is primarily due to the initial market microstructure. Crypto began as a small-scale ideological movement with a limited audience favoring a relatively uncertain asset. The emerging market infrastructure tended to be insular, ad hoc, and typically unregulated. Presently, the industry is addressing historical issues such as fragmented liquidity, lack of unified pricing standards, and uneven supply and demand across different platforms as the cryptocurrency domain gradually shifts away from a purely retail-focused market.

Attention has centered around on-chain structured products, yet the opportunity to present crypto payoffs to conventional investors is equally thrilling. With cryptocurrencies gaining significance in investment portfolio distribution, we anticipate a noteworthy strategic investment capture, one that outperforms historical measures, thanks to the high grade of institutional products and efficient delivery systems established, including but not limited to ETFs, ETPs, and various other non-listed instruments.

There’s back-tested evidence indicating that integrating BTC into a diversified investment portfolio can enhance overall performance, as evidenced by enhanced Sharpe and Sortino Ratios. Consider the following chart from Coinshares:

Additional cryptocurrency-centered products can similarly enhance portfolio performance. At ARP Digital, it is our mission to refine broader portfolios through the application of volatility products tailored to an optimally suited crypto spectrum.

Crypto market volatility is perpetually in flux, affected by factors like bifurcated market views, the prevalence of substantial leverage, and the market’s foundational structure. The absence of an earlier institutional adoption can be traced back to a reciprocal relationship wherein crypto dealers lacked the customer demand to prioritize development, and bank dealers were without the regulatory clarity or motivation to progress the market. This historical volatility can be visualized through charts such as those provided by Amberdata, highlighting the results of insufficient institutional support and engagement.

Traditional conveyance systems for crypto-based structured products depend upon integrations between cryptocurrency players and conventional financial intermediaries, presenting challenges that have necessitated critical concessions related to capital use and collateral management, ultimately impeding investor interest.

The success of spot bitcoin ETFs is evident and public recognition of the value that the cryptocurrency asset class offers, both from an investment and a psychological standpoint, is growing. Pursuing the patterns of evolution seen in other financial sectors, the domain of crypto structured products is set to flourish exponentially.

At ARP Digital, we remain assured of the enduring demand for both yield-generating and volatility-based products within the crypto sphere. The initial wave of yield products in this market often involved unsecured loans provided to market actors in pursuit of yield, occasionally undertaken with a lack of due awareness.

In light of the destabilizing episodes of 2022, investors are gravitating towards a more introspective analysis of yield sources and the related risks incurred. Unlike the proverbial free lunch, structured products deliver yields that can be determined and verified mathematically based on market conditions, which translates to more restful nights.