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Bitcoin ETF Options Will Grow the Market
The launch of bitcoin spot exchange traded funds earlier this year marked a major milestone in the asset’s path to mainstream adoption – but an even bigger breakthrough could happen later this year.
According to analyst James Seyffart, options contracts on these ETFs could go live by Q4 of this year. This will be a pivotal moment for bitcoin. While ETFs offer exposure to bitcoin for retail and institutional investors, options contracts are a much bigger opportunity since they provide the ability to precisely manage risk on one of the most volatile assets in the world. They will enable significantly greater institutional adoption in the months ahead.
At present, we have seen some institutional entrants disclose ownership of a BTC ETF in their 13F filings with the Securities and Exchange Commission. Over 600 institutions, including asset managers like Millenium Management and Schonfeld Strategic Advisors, have purchased the ETFs. Even conservative pension funds, like the Michigan Retirement System and The State of Wisconsin Investment Board have participated. However, their participation is likely more focused on the “basis trade,” a strategy for generating delta-neutral yield via purchasing spot and shorting a future, and not contributing to net new demand.
Even those not doing the basis trade likely remain limited in size without the ability to hedge their positions with options. Looking back at the history of the oil and gas energy market offers many clues as to what impact options will have on the industry. ONG shares many similarities with bitcoin, including its commodity-like nature, price volatility and the influence of global market dynamics.
In the 1970s and 1980s, oil derivatives trading was miniscule. Over the past 50 years, however, it has grown into the most liquid and sophisticated market in the world. This has both allowed actual oil producers to plan their finances in more predictable ways and speculators to participate in the industry with greater sophistication. Rather than facing the potential for a 100% loss on an investment, options allow investors to define the exact amount of potential loss and gain, making it possible to place measured bets that meet their specific goals. It’s like having a scalpel where before you only had a hammer.
The increase in liquidity creates a virtuous cycle in which more investors can participate in larger sizes, thus creating more liquidity. The trajectory of crude oil spot price has followed alongside the growth of the derivatives market. It’s reasonable to expect bitcoin markets will follow the same path.
Currently, Blackrock’s IBIT, the most traded BTC ETF available, averages around $500 – $600 million in daily trading volume, whereas the most liquid oil instruments trade around $50 billion in daily volume. Introducing BTC ETF options could help to grow these volumes, inviting in new participants and increased demand. As a consequence, institutions will turn to derivatives markets for price discovery and be able to manage risk all along the price curve. This makes bitcoin a more investable and predictable asset with greater utility. It will also likely reduce volatility in the asset as professional traders use derivatives tools to pull volatility premiums out of bitcoin.
Spot bitcoin ETFs ushered in a new era of institutional usage. Though many have their focus on the presidential election and candidates’ crypto policy, the rise of options markets will have a greater impact on price.