The approval of Bitcoin ETF options marks a new era for the Bitcoin market. With leveraged exposure, exponential growth potential, and unprecedented volatility, Bitcoin’s synthetic notional value could skyrocket.
The U.S. Securities and Exchange Commission has approved the listing and options trading of asset manager BlackRock’s spot bitcoin exchange-traded fund on the Nasdaq.
Options trading for BlackRock’s iShares Bitcoin Trust has been approved with the ticker symbol “IBIT,” the regulator said in a notice published Friday.
Index options – listed derivatives that offer a quick and cheap way to amplify bitcoin exposure – on a bitcoin index would offer institutional investors and traders an alternative way to hedge their exposure to the world’s largest cryptocurrency.
The approval of listing and trading options linked to a Bitcoin ETF represents another positive step for the cryptocurrency, once considered a nascent asset class.
Source: SEC
Cryptocurrency has moved closer to mainstream acceptance since the launch of Bitcoin ETFs earlier this year.
Options give holders the right to buy or sell an asset, such as a stock or exchange-traded product, at a predetermined price on a specific date.
Exchanges began requesting spot Bitcoin ETF options as soon as it became clear that the SEC would approve the underlying ETFs in January.
The SEC oversees technical rule changes that exchanges must make to list options. The regulator also said its existing oversight procedures will apply to IBIT options.
Bloomberg analyst Eric Balchunas said: “I suspect more will be approved soon. This is a huge win for Bitcoin ETFs (as they will attract more liquidity, which in turn will attract more big fish).”
“It’s going to be incredibly fantastic.”
While it will take months to assess the full impact of Bitcoin options, Jeff Park, Head of Alpha Strategies at Bitwise Invest, wrote the following in a recent letter that he published on X. It is worth sharing the text in full, which we have done below.
“With today’s approval from the SEC to list and trade options on Bitcoin ETFs, I shared that we are about to witness the most extraordinary surge in volume in financial history. I felt this deserved a more complete explanation, so I wanted to highlight a few characteristics of Bitcoin, the nature of the regulated options market, and the powerful combination of the two. Without exaggeration, this marks the most monumental advancement possible for the cryptocurrency market.
For the first time, Bitcoin’s notional value will be “fractionated” with ETF options. What do I mean by that? While Bitcoin’s capped, non-custodial supply is its greatest virtue, it has also been a drag, limiting its ability to create synthetic leverage. Despite Deribit’s efforts, it never adequately solved the counterparty-to-capital efficiency matrix for widespread adoption, and CME futures options required overly active management.
Now, for the first time, Bitcoin will have a regulated market where the OCC will protect clearing members from counterparty risk. This means that Bitcoin’s synthetic notional exposure can grow exponentially without the JTD risks that have kept investors at bay. In a liquidity-driven world, unlocking leveraged synthetic flows represents the biggest opportunity for Bitcoin ETFs, improving their financial utility relative to spot markets.
Additionally, Bitcoin can now express duration as part of its leverage calculation for the first time. Retail traders have adopted perps to account for leverage, but these instruments are imperfect – more akin to a series of daily DOTF options that must be rolled over constantly. With Bitcoin options, investors can now make bets on portfolio allocation based on duration, especially for long time horizons. There is a good chance that holding long-term OTM calls as a premium expense gives investors more value for their money than a fully collateralized position that could fall 80% over the same period. People often compare Bitcoin to a call option because of its declining premium and occasional explosive rise. Now, you can bet on the “vol of vol” to the upside at the same premium or less, while capturing more delta over a longer period – an extremely compelling opportunity.
Bitcoin also has some unique volatility characteristics, one of the most important of which is the “volatility smile.” Most stocks/indices exhibit a “volatility skew,” where upside volatility is cheaper than downside volatility (i.e., protection is more expensive than speculation). Bitcoin is unique in that mergers are as frequent as mergers, so the market demands a risk premium on both sides. The practical implication? This is seen in the second-order Greek called vanna. Historically, with all options, as spot increases, implied volatility tends to decline. So, as the delta of the option increases (becoming more ITM), the rate of increase slows down—this is the positive vanna (dΔ/dvol), which creates a kind of drag. However, Bitcoin options have a negative vanna: as spot increases, volatility also increases, meaning delta increases even faster. When brokers who are short gamma hedge against it (a gamma squeeze), the case for Bitcoin becomes explosive and recursive. More upside leads to more upside, as brokers are forced to continue buying at higher prices. A negative gamma vanna squeeze acts like a refueling rocket.
The most crucial factor that ties it all together: Bitcoin itself cannot be diluted to accommodate this new leverage. Compare this to stocks like GME or AMC, where management can issue new shares to exploit price anomalies, limiting the stock’s upside. Bitcoin can never do that. You might ask, “But Jeff, what about commodities like oil or natural gas? Aren’t they comparable, and if so, why is Bitcoin different?” The main difference is that most physical commodities have expiration dates, meaning they tend to trade in the futures market, not the spot market. Futures markets, unlike spot markets, vary in terms of gross and notional exposure based on expiration dates and not on physical versus paper interests, so they do not allow for concentrated participation in one direction (i.e. people trade both long and short on the curve, and physical versus paper interests). Additionally, these markets are subject to supply bottlenecks by groups like OPEC, among others.
In short, the Bitcoin ETF options market is the first time the financial world will see regulated leverage on a perpetual commodity that has a truly limited supply. Things will likely get crazy in such scenarios, and regulated markets may not be able to handle it.
But the remarkable thing about Bitcoin is that there will always be a parallel, decentralized market that cannot be shut down, unlike the CME, which, as you can imagine, will add even more fuel to the fire.
“It will be incredibly fantastic.”
