Bitcoin ETF options approved, will Bitcoin experience explosive growth?

Written by:Mensh, ChainCatcher

Edited by:Nianqing, ChainCatcher

 

On October 18, the U.S. Securities and Exchange Commission (SEC) approved applications from the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE), allowing 11 approved Bitcoin ETF providers to engage in options trading. Currently, Bitcoin continues to rise, with its price surpassing $69,000. ETF analyst Seyffart stated at the Permissionless conference that Bitcoin ETF options may be launched by the end of the year; however, the CFTC and OCC do not have strict deadlines, which could lead to further delays, making a Q1 2025 launch more likely. Meanwhile, the SEC has postponed the approval of Bitwise and Grayscale Ethereum ETF options, with market speculation suggesting that this is due to lower-than-expected fund inflows following the approval of the Ethereum ETF. The SEC aims to further examine the impact of this proposal on market stability and will make a ruling by November 10.

Why Are Bitcoin ETF Options Important?

Bitcoin options are contracts that give holders the right, but not the obligation, to buy or sell Bitcoin at a predetermined price within a specific time frame. For institutional investors, these options provide a means to hedge against price volatility or speculate on market movements without holding the underlying asset. Bitcoin index options offer a fast and cost-effective way for institutional investors and traders to expand their exposure to Bitcoin, serving as an alternative method to hedge their positions in this leading cryptocurrency.Why is the approval of Bitcoin ETF options particularly significant? Although there are already numerous crypto options products on the market, most lack regulation, making institutional investors hesitant to participate due to compliance requirements. Additionally, there has not yet been a compliant and liquid options product available in the market. The most liquid options products are provided by Deribit, the largest Bitcoin options exchange globally, which offers 24/7/365 trading for Bitcoin and Ethereum options. These options are European-style and settle in the underlying cryptocurrency.However, since they are limited to cryptocurrencies, Deribit users cannot cross-margin with assets from traditional portfolios like ETFs and stocks. Moreover, such products are illegal in many countries, including the United States. Without the backing of a settlement institution, counterparty risk cannot be effectively managed. The Bitcoin futures options offered by the Chicago Mercantile Exchange (CME) and Bitcoin options from LedgerX, which is regulated by the CFTC, show significant bid-ask spreads and limited functionalities. For instance, LedgerX lacks a margin mechanism. Each call option on LedgerX must be sold in a cash value equivalent to the underlying Bitcoin, resulting in higher trading costs. Options linked to Bitcoin-related assets, such as MicroStrategy options or BITO options, often exhibit significant tracking errors. The surge in MicroStrategy's stock price this year indirectly indicates market demand for Bitcoin hedging trades.

The Bitcoin ETF options can provide the market with options products that are both compliant and deep in liquidity. Bloomberg researcher Jeff Park noted, "With Bitcoin options, investors can now performEnhancing or Reducing Volatility?

The impact of Bitcoin ETF options on Bitcoin volatility has sparked debate, with both sides presenting compelling arguments. Those who believe volatility may be enhanced argue that the introduction of options could lead to a surge of retail investors flocking to very short-term options, potentially creating a gamma squeeze similar to what was seen with meme stocks like GME and AMC. A gamma squeeze occurs when accelerating volatility causes a trend to persist, as investors purchase options, compelling their counterparties—large trading platforms and market makers—to continually hedge their positions by buying more Bitcoin, thus driving prices further up and generating additional demand for call options.However, since there are only 21 million Bitcoins, Bitcoin is an absolutely scarce asset. If a gamma squeeze occurs, the only sellers would be those who already own Bitcoin and are willing to trade it at higher dollar prices. As everyone knows that no more Bitcoin will be created to lower the price, these sellers are unlikely to choose to sell. Existing options products have not demonstrated gamma squeeze phenomena, suggesting that such concerns may be unwarranted.

Concentrated expirations of options could also trigger market volatility in the short term. Deribit CEO Luuk Strijers noted that the open interest in Bitcoin options expiring at the end of September is historically the second largest, with about $58 billion in open contracts on Deribit. He believes that this expiration may lead to over $5.8 billion in options becoming worthless, potentially causing significant market volatility afterward. Historically, options expirations do influence market volatility. As the expiration date approaches, traders must decide whether to exercise their options, let them expire, or adjust their positions, which often increases trading activity as traders attempt to hedge their bets or capitalize on potential price changes. Especially if Bitcoin's price is near the strike price at expiration, option holders may choose to exercise their options, leading to greater buy and sell pressure in the market. This pressure could trigger price fluctuations following the expiration.

On the other hand, those who believe volatility may be smoothed out take a more long-term perspective. They argue that options prices reflect implied volatility, which is investors' expectations of future volatility. The introduction of Bitcoin ETF options may bring in new liquidity and attract more structured product issuances, which could potentially reduce volatility. If implied volatility is too high, more options products will enter the market to help stabilize it.

time-based portfolio allocations, particularly for long-term investments."

 

Annual Realized Volatility of Bitcoin

Bloomberg analyst Eric Balchunas pointed out that the approval of options is a significant victory for Bitcoin ETFs, as it will bring deeper liquidity and attract "bigger fish." At the same time, the approval of IBIT options is another clear regulatory statement. Galaxy Digital CEO Mike Novogratz stated in a CNBC interview, "Unlike traditional Bitcoin futures ETFs, these options allow trading over specific time intervals, which could generate more interest due to Bitcoin's inherent volatility. The approval of ETF options may attract more investors. MicroStrategy's trading volume reflects strong demand for Bitcoin. Regulatory clarity could pave the way for future growth in digital assets." For the existing options market, the approval of ETF options will also yield greater benefits. In the Unchained podcast, Arbelos Markets co-founder Joshua Lim speculated that the growth of liquidity in CME options will be most evident, as both face traditional investors, creating arbitrage opportunities that will enhance liquidity in both markets.

Variant Price Performance

The introduction of options not only provides investors with more diverse operational opportunities but also brings about previously unanticipated price performances. For example, Joshua Lim noticed that many traders were purchasing call options following the elections, indicating a willingness to make a hedging bet that the regulatory environment for cryptocurrencies will relax after the November 5 elections. Typically, there is some price volatility around the expiration dates of these options, and this volatility is often highly concentrated.

If many people buy Bitcoin options with a strike price of $65,000, traders hedging their risk at this level usually buy when the price is below $65,000 and sell when it is above this price, effectively pinning the Bitcoin price around the strike price. If there is a certain trend, it often manifests only after the options expiration for various reasons. For instance, options typically expire on the last Friday of the month, but this does not always align with the calendar month’s end, which is particularly significant as it marks performance evaluations and share trades for hedge funds, creating capital inflows and buying pressure in that asset class.

Due to all these dynamics, there is indeed volatility in the spot market after options expiration, as many traders' hedging activities may weaken post-expiration. Options do not trade over the weekend, and if the gamma value of IBIT is very high at market close on Friday, traders may be forced to buy Bitcoin in the spot market over the weekend to hedge their delta. Since IBIT has cash redemption, transferring Bitcoin between IBITs may pose some risks. All these risks could ultimately spill over into the Bitcoin market, potentially leading to wider bid-ask spreads.

 

Conclusion

For institutions, Bitcoin ETF options can significantly expand hedging strategies, allowing for more precise risk and return management and enabling more diversified portfolios. For retail investors, Bitcoin ETF options provide a way to participate in Bitcoin volatility. The multifunctionality of options may also trigger bullish sentiment in the classic reflexivity of the market, as liquidity begets more liquidity. However, whether options can effectively attract funds, achieve sufficient liquidity, and create a positive feedback loop of capital attraction still requires market validation.

This article is sourced from Foresightnews:

https://foresightnews.pro/article/detail/70105

Best regards,

The AIC Team

October 28, 2024