Options in the crypto market: Opportunities and Risks Coexist

In the past year, the primary market of the encryption industry has fallen into a slump, with various issues and regulatory loopholes gradually coming to light. As a potential booster for new projects, market makers should support project development by providing liquidity and stabilizing prices. However, a collaborative method called "loan options model" may benefit both parties during a bull market, but in a bear market, it has been abused by some bad actors, causing serious damage to small crypto projects, leading to a collapse of trust and market chaos.

Although traditional financial markets have also faced similar challenges, they have minimized the impact of these issues through mature regulations and transparent mechanisms. The crypto industry can fully learn from the experiences of traditional finance to address the current chaos and build a fairer ecosystem. This article will delve into the operational mechanisms of the loan Options model, its potential risks to projects, comparisons with traditional markets, and an analysis of the current market conditions.

Options Lending Model: Surface Shiny, but Actually Hides Risks

In the crypto market, the main responsibility of market makers is to ensure sufficient liquidity in the market through frequent buying and selling activities, preventing severe price fluctuations due to a lack of trading counterparts. For emerging projects, collaborating with market makers is almost a necessary path, as it not only helps the project to be successfully launched on exchanges but also attracts more investor attention. The "loan options model" is a widely adopted cooperation method: the project party lends a large number of tokens to the market makers at no cost or low cost; the market makers then use these tokens to make markets on the exchanges, maintaining market activity. Contracts usually also include options clauses, allowing market makers to return tokens at an agreed price or purchase them directly at specific future points in time, but they can also choose not to exercise this option.

On the surface, this model seems to achieve a win-win situation: the project side gains market support, while the market makers profit from the trading spreads or service fees. However, the problem lies precisely in the flexibility of the options terms and the opacity of the contracts. The information asymmetry between the project side and the market makers provides an opportunity for some dishonest market makers. They may use borrowed tokens to disrupt market order, placing their own interests above the project's development.

Predatory Behavior: How Projects Get Into Trouble

When the loan options model is abused, it can cause severe damage to the project. The most common tactic is "market smashing": market makers suddenly sell a large number of borrowed tokens, leading to a sharp drop in price. Retail investors notice the abnormality and follow suit in selling, causing the market to fall into panic. Market makers can profit from this, for example, through "short selling" operations—first selling tokens at a high price, then buying them back at a low price after the price collapses to return to the project party, making a profit from the price difference. Alternatively, they may exploit the options terms to "return" tokens at the lowest price, completing the transaction at a very low cost.

This operation can be devastating for small projects. There are cases showing that token prices can be halved in just a few days, with market value rapidly evaporating, and the opportunity for project refinancing is basically lost. More seriously, the lifeline of crypto projects lies in the trust of the community; once the price collapses, investors either believe the project is a scam or completely lose confidence, leading to the disintegration of the community. Exchanges have strict requirements for the trading volume and price stability of tokens, and a price crash may directly lead to the delisting of the token, putting the project's prospects in jeopardy.

What makes matters worse is that these cooperation agreements are often obscured by Non-Disclosure Agreements (NDAs), making it difficult for outsiders to understand the specific details. Most project teams are composed of technical personnel, lacking experience in the financial market and awareness of contractual risks. When faced with experienced market makers, they often find themselves at a disadvantage and may even be unaware of the "trap" contracts they have signed. This information asymmetry makes small projects easy victims of predatory behavior.

Other Potential Traps

In addition to lowering token prices through the "loan options model" and abusing options terms, market makers in the crypto market have other tricks specifically targeting inexperienced small projects. For example, they might engage in "wash trading" operations, using their own accounts or "sockpuppet" accounts to trade with each other, creating false trading volumes that make the project appear very popular, attracting retail investors. But once this operation stops, trading volume could instantly drop to zero, prices could collapse, and the project might even face the risk of being delisted from the exchange.

Contracts may also conceal various "traps", such as excessively high margin requirements, unreasonable "performance bonuses", and even allowing market makers to acquire tokens at low prices and then sell them at high prices after listing, causing massive selling pressure and leading to a sharp price drop, resulting in significant losses for retail investors, while the project parties bear the blame. Some market makers may also exploit information advantages, gaining early knowledge of favorable or unfavorable news about the project to engage in insider trading, inducing retail investors to buy in after the price is driven up, or spreading rumors to depress the price before buying in large quantities.

Liquidity "kidnapping" is another common tactic. Market makers threaten to raise prices or withdraw funds once the project party becomes dependent on their services. If the project party does not agree to renew the contract, they may face the risk of being dumped, putting the project party in a dilemma.

Some market makers also promote "bundled" services, including marketing, public relations, and price manipulation. On the surface, it seems very professional, but in reality, it may all be fake traffic. After the price is artificially inflated, it will inevitably crash, and the project parties not only incur huge costs but may also get into trouble. Moreover, some market makers serve multiple projects at the same time, which may lead to favoritism towards large clients, intentionally lowering the prices of small projects or transferring funds between different projects, creating a "one rises as another falls" effect, resulting in significant losses for small projects.

These malicious behaviors exploit the regulatory loopholes in the crypto market and the weaknesses of project parties due to inexperience, which may ultimately lead to a significant shrinkage in project market value and a collapse of community confidence.

How Traditional Financial Markets Respond

Traditional financial markets - including stocks, bonds, and Futures - have also faced similar challenges. For example, "bear market attacks" depress stock prices through massive sell-offs to profit from short selling. High-frequency trading firms sometimes use ultra-fast algorithms to gain an edge in making markets, amplifying market volatility for profit. In the over-the-counter (OTC) market, the lack of transparency provides some market makers the opportunity to make unfair quotes. During the 2008 financial crisis, some hedge funds were accused of maliciously shorting bank stocks, exacerbating market panic.

However, traditional markets have developed a relatively mature set of coping mechanisms, and these experiences are worth learning from the crypto industry.

1. Strict regulation: The U.S. Securities and Exchange Commission (SEC) has established Rule SHO, which requires that stocks must be borrowed before short selling to prevent "naked short selling" practices. The "up-tick rule" stipulates that short selling can only occur when the stock price is rising, limiting malicious price manipulation. Market manipulation is explicitly prohibited, and violations of Section 10b-5 of the Securities Exchange Act may face hefty fines or even criminal penalties. The European Union also has a similar Market Abuse Regulation (MAR) that specifically targets price manipulation.

2. Information Transparency: Traditional markets require listed companies to report the content of agreements with market makers to regulatory authorities, and trading data (including prices and transaction volumes) is made public, allowing retail investors to view it through professional terminals. Any large transactions need to be reported to prevent secret "dumping" actions. This transparency significantly reduces the motivation for market makers to violate regulations.

3. Real-time monitoring: The exchange uses algorithms to monitor market dynamics. Once abnormal fluctuations or trading volumes are detected, such as a sudden significant drop in a stock, an investigation procedure is triggered. The circuit breaker mechanism is also widely applied; when price fluctuations are too large, trading is automatically suspended, giving the market a cooling-off period to avoid the spread of panic.

4. Industry Standards: Institutions such as the Financial Industry Regulatory Authority (FINRA) have established ethical standards for market makers, requiring them to provide fair quotes and maintain market stability. Designated Market Makers (DMM) on the New York Stock Exchange must meet strict capital and conduct requirements, or they will lose their eligibility.

5. Investor Protection: If the actions of market makers disrupt market order, investors can seek compensation through class action lawsuits. After the 2008 financial crisis, several banks were sued by shareholders for market manipulation. The Securities Investor Protection Corporation (SIPC) also provides a certain degree of compensation for losses caused by broker misconduct.

Although these measures are not perfect, they have indeed significantly reduced predatory behavior in traditional markets. The core experience of traditional markets lies in the organic combination of regulation, transparency, and accountability mechanisms, creating a multi-layered protective network.

Vulnerability Analysis of the Crypto Market

Compared to traditional markets, the crypto market appears to be more fragile, mainly due to:

1. The regulatory system is not yet mature: Traditional markets have over a hundred years of regulatory experience, and the legal system is relatively complete. The global regulatory landscape of the crypto market is still in a patchwork state, with many regions lacking clear regulations against market manipulation or market maker behavior, providing opportunities for bad actors.

2. The market size is relatively small: The market capitalization and liquidity of cryptocurrencies still have a significant gap compared to the U.S. stock market. The operations of a single market maker can have a huge impact on the price of a certain token, whereas large-cap stocks in traditional markets are not easily manipulated in this way.

3. Lack of experience from the project party: Many crypto project teams are mainly composed of technical experts and lack an in-depth understanding of how financial markets operate. They may not fully recognize the potential risks in the loan options model and can easily be misled by market makers when signing contracts.

4. Lack of transparency: The crypto market commonly uses confidentiality agreements, and contract details are often kept strictly confidential. This secrecy, which has long been a focus of regulatory attention in traditional markets, has become the norm in the crypto world.

These factors combined make smaller projects easy victims of predatory behavior, while also gradually eroding the trust foundation and healthy ecosystem of the entire industry.