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Comment by samograd | Hacker News Reader

I'm sure you could buy Call options[1] to eliminate that downside risk, if someone is willing to price and sell such an option to take that risk for you.

[1] Call options[2] give you the right, but not obligation, to sell an asset at a given price, so if the strike price of the option is the price you don't want the BTC to go below, and the price of BTC does go below that value, you eliminate your downside risk because somebody has already agreeed with you to buy at that price - and you have to pay for that agreement up front.

[2] Options ~= Insurance, where ~= means 'pretty much equals'

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You buy puts to hedge longs. Put selling puts on BTC would be pretty insane. As a whole there are no insurance sellers. Insurance will be too expensive. But perhaps there some kind of crazy solutions to offset volatility to the network or something similar.

The OP was talking about shorting so I mentioned Calls because of the buy back at the end.

There's not a lot of historical BTC price data and the volatility is all over the place, so using mathematical option value models would be pretty crazy, but they might give an idea of your baseline price before using a major premium risk factor multiplier as well. 'Greater fools' and all...I'm sure somebody would buy them if they were being sold.

Volatility comes from uncertainty. That is going to remain high. Which means if I hold Bitcoin there is the chance that I will wake up tomorrow losing 50% of the value. But insurance for that decline is to expensive. Perhaps one could create different kinds of insurance or transfer mechanisms which mitigates that risk.

That's what options are and there are pricing models that take into account high volatility accordingly. I call them 'insurance' because that's how I see them after learning and working with them. They are simply a transfer of risk from one party to another; the buyer of the option is selling their risk, the seller is taking it on for a period of time with certain conditions. The 'option' part is whether they are exercised, just like when you buy fire insurance (a risk you don't want to have) and your house doesn't burn down, the insurance seller is ahead and your risk as the buyer is reduced or eliminated. There is also the problem of determining how much risk the option seller can take on and handle before falling over when they have to pay up, but I'm sure there's also options available to mitigate that risk as well; it's turtles all the way down.

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