Bitcoin Options Market Launch

The Bitcoin Options Market Launch is just around the corner. There will soon be a regulated options market for U.S. Bitcoin ETFs. But what does that mean, and how will it impact the price of Bitcoin?

A New Era for Bitcoin Investors

On Friday, the U.S. Securities and Exchange Commission (SEC) greenlighted Nasdaq to list and trade options for the iShares Bitcoin Trust. This is 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.

Understanding Bitcoin Options

Options are derivative instruments. They let investors acquire the option to either buy or sell Bitcoin at a predetermined price at a later date. Options for buying are called “calls,” and options for selling are called “puts.”

“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 opening and maintaining a short position in the perpetual futures market.”

Potential Impacts on Bitcoin’s Price

Moreno said options will allow investors to earn yield using a covered call strategy. This involves selling call options while holding spot Bitcoin. The Roundhill Bitcoin Covered Call Strategy ETF has used this method 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.

Analysts Weigh In

“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 that regulated options will allow Bitcoin’s notional exposure to grow exponentially. Existing crypto options trading venues like Deribit 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.

Factors Influencing Volatility

The first is Bitcoin’s “volatility smile.” This describes derivatives traders’ willingness to pay high premiums for both exposure to and protection from heavy 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.

Counterpoints from Other Analysts

Not every analyst was quite as sensational. 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.”

The Bitcoin Options Market Launch could mark a pivotal moment for the crypto industry. While some analysts predict explosive growth and volatility, others believe options will stabilize the market over time. Whether volatility increases or decreases depends on the balance between speculation and hedging in the market. 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.