Note: This is an excerpt from the upcoming onchain options research report. As such, it’s not complete and covers only the gist of one section.
The onchain options sector is the largest whitespace in crypto today. This makes it the most compelling sector to allocate capital towards. Retail demand is already proven at massive scale in TradFi. And onchain, the binding constraints are no longer regulation or infrastructure. Maker liquidity is improving rapidly in tandem.
When looking at the TAM and sizing the opportunity, it’s a matter of when, not if, onchain options take center stage. The final evolution of every mature financial market is expansion into options, and crypto has reached this inflection point.
As this nascent sector is heating up, it’s finally primed to take on its ultimate challenge: cracking distribution to hit escape velocity by onboarding non-toxic (retail) taker flow at scale.
Retail Demand for Options Is Massive. Around The Globe.
There are many misconceptions around options trading, and the evidence for massive retail demand is so clear that it would be a disservice to you as a reader and investor not to spend time highlighting it. In our distribution section, we spend ample time arguing how important it is to onboard non-crypto native retail to crypto.
That’s because no global financial market hit escape velocity in its options sector until retail arrived. Funnily enough, the most persistent and totally incorrect claim you hear spouted on CT is: “retail doesn’t understand options, so they will never trade them onchain.”
Crowned strawman argument of the year, because all evidence points to the opposite. Does it take time to comprehend the greeks and the payoff structure? Absolutely, but the complexity of pricing theory doesn’t diminish interest in product demand.
In reality, options are retail traders’ favorite derivative. When access isn’t limited and UI sleek, retail trades options at outrageous scale. For the non-believers, please consult the exhibits below:
Exhibit A: U.S. Options contract volume more than tripled since 2017, driven by retail.
No need to look further than the U.S. Prior to and between 2014 and 2017, institutions dominated options volume. Retail participation was negligible. As a result, growth was stagnant, hovering around 4B annual contracts traded. In December 2017, Robinhood launched commission-free options and many brokers followed suit.
Then COVID hit and the stars aligned.
Everyone was stuck at home, waiting for things to reopen and life to continue. Asset prices cratered on the initial shock news and everyone turned to investing. Drumbeat marketing coupled with newfound retail interest in finance conjured up the perfect storm. Retail onboarded to finance apps at scale, and options volume followed suit.
Note: T
...