What Are Options?
If until now your exposure to options has been mostly focused on choosing which pizza toppings you want, you may be lost when discussions come up around investments. But don’t worry, you’re not alone.
In the investment world, options are akin to financial contracts where their value is dependent on underlying assets. One might be compared, for example, to a home insurance contract where the premium will depend on the condition and location of the house (the underlying asset) as well as the term of the policy. As a buyer, you purchase an insurance contract to protect you if your house goes up in smoke. As a seller, you hope the profit you make from the contract sale exceeds anything you might ever have to dole out.
Options allow investors to speculate or hedge against the volatility of the underlying asset and there are two types. Call options enable investors to make a profit if the underlying asset increases. Put options allow them to profit if it goes into decline.
So Is Bitcoin an Option?
Technically, no. But–and here we’ll go back to the insurance contract example–it acts as a put option to fiat currencies like the U.S. dollar (the underlying asset) if one day it goes up in smoke.
It’s also better than most options. Just as with insurance contracts, investors who buy options are limited to the length of their contract, and at some point, that contract will expire. Not so with bitcoin. And, as a result, the value of the option does not decrease over time. So long as you own BTC, should fiat currencies fail, you’ll have an insurance contract against them.
Where the Central Bank Comes In
People who invest in BTC tend to benefit from instability in credit markets. Why? Congress founded the Federal Reserve System, what we call the central bank of the United States, as a means to keep our financial system flexible, safe, and stable. And for decades, investors have taken for granted that the Fed will always step in and rescue the stock market if it’s on the verge of collapse.
However, the more the Fed intervenes in monetary policy, the more the U.S. debt burden increases and the less the dollar can purchase. That disorder creates uncertainty about the security of fiat systems and can result in a pullout from investors looking for a safer investment–one that is not fiat-based.
By investing at least a small portion of one’s portfolio in bitcoin, investors can insure themselves against a potential global fiat collapse.