Bitcoin Options Coinut Initial Thoughts

I’ve been investing in bitcoins for the past year, but I have expertise in derivatives, and I’ve been wishing that a bitcoin derivatives market would emerge soon. I have various bitcoin investments such as funding loans on p2p sites, funding margin on fx sites, and cloud mining pools, but the financial system for bitcoin is still nascent. Benchmark rates don’t really exist at this point, although a bunch of different bitcoin price indexes exist.

I’ve been watching a site called Coinut, which is a bitcoin option exchange, to see whether any liquidity will develop. But it seems over the past few months that liquidity hasn’t really picked up. Instead of waiting on the sidelines, I’ve decided to open an account on Coinut and start making markets myself.

Opening an account on Coinut is fairly easy, you just need a username, password, and e-mail address. Seems like each new account gets a small bonus of bitcoins just for signing up. Once I confirmed my account, I logged in and noticed 7 menu choices on the top main menu of each page. Tutorial, FAQs, Trade, Funding, History, Profile, Audit.

Starting with the audit tab, the audit page lists some details about the user balance and how much is in the Coinut wallet. There is also an audit time lists, but today it looks like the last “audit” was done 5 months ago, that doesn’t give me much confidence!? Seems like the audits are done using a Merkle Tree, which is a type of cryptology that I’m not familiar with, but I should do more research on.

The Profile tab allows users to change their password and enable two factor authorization, they support Google Authenticator.  Users can also change their e-mail address, obtain an API key for integration, and use an affiliate link which provides the referrer with 10% of the fees generated from referred accounts.

The History tab allows users to view their transaction histories and export to CSV.  The Funding tab shows the user’s deposit address which can be re-generated and a withdrawal address. The Trade tab is the order entry screen and a Tutorial tab that I haven’t explored with an FAQs tab with common questions.

There are two types of options available to trade: binary and european. The european options are called “vanilla” options on the site. The contract size is 0.01 BTC or 1% of a bitcoin in other words.  The contracts are based on an internal index that gives various weights to the major BTC platform prices. The index formulation is listed below:

Exchange Price Weight
Bitfinex 452.690000 0.029100
Bitstamp 452.800000 0.011472
Coinbase 455.440000 0.165079
OKCoin 453.170000 0.019601
BTCC CNY 454.953321 0.261188
Huobi CNY 454.973352 0.433884
itBit 453.590000 0.019020

The index is realtime and works just fine for me as I already use Coinbase and Bitfinex.

In terms of account level security, users are sent an e-mail each time an event occurs (logins, trades, etc).  I’ll post more about this site as I gain more experience with it.  I’m going to study various aspects of it including margin requirements, liquidity, etc in future posts. So far, the Coinut market architecture looks promising, although the liquidity looks thin.  I guess this provides both risks and rewards depending on what my strategy will be.