There will soon be a regulated options market for U.S. Bitcoin ETFs. But what does that mean, and how will this impact the price of Bitcoin?
On Friday, the U.S. Securities and Exchange Commission (SEC) greenlighted Nasdaq to list and trade options for the iShares Bitcoin Trust—BlackRock’s $22 billion Bitcoin ETF whose shares track the price of Bitcoin. According to analysts, introducing options will make Bitcoin a more functional investment asset across the board.
Options are derivative instruments that let investors acquire the “option” to either buy or sell Bitcoin at a pre-determined price at a later date. Options for buying and selling are called “calls” and “puts” respectively.
“Investors can now buy put options if they think Bitcoin will experience a price correction,” Julio Moreno, CryptoQuant’s research head, told Decrypt. “Typically, this can be done with lower capital and at a lower cost than to open and maintain a short position in the perpetual futures market.”
Moreno said options will allow investors to earn yield using what’s known as a covered call strategy which involves selling call options while holding spot Bitcoin. The Roundhill Bitcoin Covered Call Strategy ETF has used this strategy for months through Bitcoin futures ETFs to offer 30% APY to investors.
While excitement online for the approval was palpable, there’s debate around just how bullish Bitcoin options could be.
“We are on the verge of witnessing the most extraordinary upside “vol of vol” in financial history,” wrote Jeff Park, Head of Alpha Strategies at Bitwise, in a Twitter post on Friday. “Without exaggeration, this marks the most monumental advancement possible for the crypto market.”
Park argued regulated options will allow Bitcoin’s notional exposure to grow exponentially for the first time in a market where the Office of the Comptroller of the Currency protects clearing members from counterparty risks. Existing crypto options trading venues like Derebit have failed to achieve broad adoption, he said.
More importantly, Park claimed Bitcoin’s characteristics combined with options could provide outsized potential for upside volatility.
The first is Bitcoin’s “volatility smile,” describing derivatives traders’ willingness to pay high premiums for both exposure to and protection from heavy upside or downside price volatility. This gives Bitcoin options “negative Vanna,” meaning the asset’s volatility rises alongside its spot price, making Bitcoin’s upside “explosively recursive.”
The second is Bitcoin’s fixed supply. As new leverage enters the system, new coins cannot be printed to accommodate it—a phenomenon that’s historically capped the rise of explosive meme stocks like GME or AMC.
Though markets for other commodities like oil and natural gas exist, the analyst said they trade more closely with the futures market since they have expiration dates. They’re also subject to supply manipulation by OPEC and other groups.
“Bitcoin ETF options are the first time the financial world will see regulated leverage on a perpetual commodity that is truly supply constrained,” he concluded. “Things will likely get wild. In such scenarios, regulated markets may shut down.”
Not every analyst was quite as sensational, however. Coinshares’ head of research, James Butterfill, predicts options will “dampen down” Bitcoin volatility over time “because they give investors the ability to do more directional trades.”
“They will allow greater retail participation and the ability to leverage, so it will likely significantly improve liquidity,” he said. “Although the options will not offer the same bankruptcy remote features that the physically backed ETFs themselves have.”
Minseh Bhindi, known on Twitter as the Bitcoin bull “British HODL,” made a similar prediction on Monday, claiming options will require market makers to neutralize the delta on their users’ positions to protect themselves from risk of loss. While this should theoretically weaken volatility all around, he claimed that only downside volatility will be reduced in practice.
“When it comes to the upside, because of the finality and scarcity of the asset… you’ve got a shitstorm brewing,” Bhindi said. “If you thought GameStop had an amazing rise, what happens when there’s a gamma squeeze on IBIT?”
According to CryptoQuant’s Moreno, options could theoretically introduce more “paper Bitcoin” to the market, effectively increasing the Bitcoin supply and suppressing the asset’s price. That said, he predicted options will be “net bullish” since they bring increased liquidity to Bitcoin.
“Whether volatility increases or decreases depends on the balance between speculation and hedging in the market,” he said. “ In many cases, the introduction of options can lead to a temporary spike in volatility due to increased trading activity, followed by stabilization as market participants use options to manage risk.”
