On Feb 5th, the cryptocurrency trading platform LedgerX introduced a new type of bitcoin derivative contract according to a blog post. LedgerX is the first and only US-regulated derivatives platform to settle a variety of Bitcoin derivatives for their clients — but so far what they've done is more of a permutation on existing financial ideas than an evolution. Swaps, options, and futures are all well known quantities in the traditional financial world.
The LedgerX Halving Contract (LXHC) is a binary option that settles to something unique to Bitcoin — when the next halving will happen. This contract will allow you to get a fixed payoff if the next halving block (#630,000) happens before a certain date and time. If the block is discovered after, the contract expires at zero. The result is an extremely clean binary payoff that is verifiable by all participants — a great demonstration of the value of a public blockchain.
Binary options have traditionally been associated with gambling events. Most financial issues are near continuous — stock prices, oil prices, weather temperatures, etc. behave as such. Binary outcomes tend to be whether someone wins an election or not, or whether a team wins the Super Bowl or not. Even financial binary contracts are often shunned by Wall Street desks — traders managing their gamma have difficulties with the risk-reversal situations that binary options present.
But Bitcoin is unique in that there is a fundamental economic risk that is binary. To give an analogy, imagine you are an oil producer such as Exxon Mobile and know that one day in 2020, the number of barrels of oil you extract will go down by half, forever. But you’re not certain which date that will be. This would materially impact planning for investment and operations. Bitcoin miners face this exact risk approximately every 4 years for the block reward that they earn.
The date the actual block will occur will also intrigue speculators and liquidity providers, as it’s a function of hardware advances, electricity costs, and market dynamics. There will be plenty of interesting opportunities to analyze and profit from, and they will be listing several different contracts around the currently projected date. For those who know binary options, this range will also allow them to derive another value.