This week, the buzz surrounding the prospect of spot Bitcoin Exchange Traded Funds (ETFs) being approved by the US Securities and Exchange Commission (SEC) has helped propel Bitcoin to its highest price since May 2022. The latest BTC rally rests on the assumption that such ETFs will unlock an influx of institutional investment. But how else might they affect the crypto market?
Alongside fresh capital, ETFs will also open the door to new investors and new trading strategies. Already, a booming crypto options market points to growing levels of sophistication among traders, with options and other derivatives increasingly influencing spot prices.
According to Laevitas , the open interest in Bitcoin and Ether options contracts surged to over $20B on Thursday, October 26, approaching the market’s all-time high, which was recorded on November 9, 2021.
However, during the previous peak, Bitcoin was trading at over $60,000. In other words, the recent surge represents significantly more open positions, they are just worth less.
Meanwhile, data from multiple exchanges shows that the volume of Bitcoin options trades in October has already surpassed $32B.
Put simply, options create a contract between a buyer and a seller. The contract gives traders the right (but not the obligation) to buy or sell assets at a predetermined price and time. Contracts that relate to buying assets are known as call options. Contracts that relate to selling are known as put options.
For crypto traders, options create significant leverage opportunities and can generate much higher profits than holding the underlying cryptocurrencies.
However, their complexity makes them unsuitable for inexperienced investors. Like most crypto derivatives, options are typically preferred by more sophisticated traders.
The growth of the crypto options market indicates the presence of experienced, professional traders. The cryptocurrency market was once in its infancy, primarily trading Bitcoin as a commodity. However, the proliferation of crypto derivatives has unlocked the potential for significantly more complex trading strategies.
What’s more, with $4.5B of Bitcoin options settled on Friday, October 27, alone, derivatives markets increasingly have the potential to influence spot prices, with large liquidations more likely to increase volatility.
ETFs, on the other hand, have the potential to stabilize cryptocurrency prices by increasing liquidity and diversifying the investor base.
For traders, ETFs will also create new opportunities for arbitrage and high-frequency trading strategies that exploit small discrepancies between the price of ETF shares and the underlying assets they represent.