If the ETF exists you could protect your investment

[rfisher1968]

When the ETF starts to trade, soon after there will be options on that ETF which will allow you to protect your self on the downside with a PUT and speculate on the upside with a CALL. Options will allow the market to stabilize the price.

[minerpumpkin]

You can do all kinds of crazy margin trading on Finex already and even bet with binary options on various shady sites. You can see what this does to the price when you take a lot at Finex: Candles going all the way through to $100, 10k of Bitcoins being sold because of a cascade of margin-calls. People get wiped out there. I wouldn't exactly call this stabilization.

[rfisher1968]

bitfinex.com deals in bitcoin futures, not options like CALLs and PUTs. Like on the stock Apple, I can buy a CALL at the strike price of $110 that expires on January 9th for $131 http://finance.yahoo.com/q?s=AAPL150109C00110000. If the price of Apple goes up above $111.31 before the expiration date you can make money and only risk $131. If I want to protect the Apple shares I own, I can buy a PUT at strike price $100 that expires January 9th for only $14 that will have value if Apple stock drops below $99.86 http://finance.yahoo.com/q?s=AAPL150109P00100000. Thats very cheap insurance for a 10% drop.

You can do all kinds of crazy margin trading on Finex already and even bet with binary options on various shady sites. You can see what this does to the price when you take a lot at Finex: Candles going all the way through to $100, 10k of Bitcoins being sold because of a cascade of margin-calls. People get wiped out there. I wouldn't exactly call this stabilization.

[applesRyummy]

Stocks (and ETFs) that have options traded on them tend to have liquid markets and as a general rule are more stable. However they have options traded on them because they are generally stable, not the other way around.

I would say that the use of options (and other derivatives) increase volatility, especially when a group of the options are expiring. Just look at how stable prices are when there is triple expiration (the expiration of options, futures and options on futures all on the same day)