That is, the buyer paid the seller $990,000 today, and has the right but not the obligation to buy 275 bitcoin for $13.75 million any time before December 28, 2018. These 275 bitcoin are held by the LedgerX clearinghouse and will be released on Dec. 28, 2018 to either the buyer (if the buyer exercises the option by paying $13.75 million) or the seller (if the buyer does not exercise).
The implied volatility of this trade is 128 percent, which seems quite high for a one-year option, and perhaps speaks to investor enthusiasm for secure, levered bitcoin bets without the need to handle physical bitcoin, or perhaps to the reluctance of large bitcoin holders to sell even a little bit of their upside.
Another natural trade is for large bitcoin holders to buy out-of-the-money puts on some of their holdings in order to borrow money against them. Selling these puts also gives investors levered exposure to bitcoin, while providing bitcoin holders with cash
This is a key difference between cash-settled futures (as Cboe and CME offer) and physical-settled derivatives (as LedgerX offers). Physical settlement enforces a link between the derivative price and the physical price. In the case of LedgerX, which requires 100 percent collateral, the physical bitcoin are actually taken off the market. This reduces price volatility and guarantees that at least one side of any LedgerX trade actually owns physical bitcoin.
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