This article is a collaborative piece written by Greg Foss and Seb Bunney. Therefore, when the word “we” is used, the authors are referring to themselves.
In “part one” of this article, we provide a high-level overview on options, the components that make them valuable and how these components are priced in order to come up with a comprehensive value for any particular option. Readers who are not familiar with options and option pricing are encouraged to read “part one” before moving on to the rest of the article.
For more option-savvy readers, you may jump immediately to “part two,” where we will explore why we believe bitcoin (BTC) is a long volatility position. Since most other assets in a diversified investment portfolio are in fact short volatility positions, bitcoin can offer portfolio hedges in the event of increased volatility in tangential markets.
We then extend the analysis to determine why bitcoin is in fact a very valuable “exotic” option. Moreover, as an exotic option with no term, there is no time decay on your long volatility position. Finally, in a world where exotic options generally require a contract with a defined counterparty (they are not generic, thus don’t trade on exchanges per se), the fact that bitcoin has no counterparty risk leads to the conclusion that bitcoin is the perfect option that, over time, will come to be embraced by investors as a hedge to a short volatility-biased investing world.
*Don’t fret if this introduction went over your head, instead just start with “part one” below.
Before we can truly comprehend why bitcoin may be the “perfect” option instrument, we must first go over a little options theory. This will help us more easily grasp the concept of bitcoin
