With the approval of spot Bitcoin ETF options, we expect Bitcoin’s price volatility to surge, Jeff Park, head of Alpha Strategies at Bitwise Investments. Park explains in an interview with Anthony Pompliano how these new options are different from existing crypto derivatives and will have a massive effect on Bitcoin’s market dynamics.
Park said volatility expresses probabilities of outcomes as well as the severity of them, and not just past performance. But his introduction of Bitcoin ETF options would give new skin to how traders play Bitcoin, possibly boosting the price swings on both ends.
Bitcoin ETF Options Regulated Market
Option contracts on Bitcoin do exist on offshore venues like Deribit and LedgerX, but ETF options provide the regulated market under U.S authorities such as SEC and CFTC. Also added to the security of such trades, Park noted, is the presence of the Options Clearing Corporation (OCC), a move for which most institutional had been waiting.
He also discussed the benefit of cross-collateralization provided by crypto focused platforms. This means traders can use non correlated assets, like gold ETF, as collateral in a Bitcoin trade, which naturally increases the liquidity and efficiency of the market. This was a huge unlock for the Bitcoin derivatives market, he said.
Park believes that when ETF options are introduced to BTC , its price swings will only be amplified. For dealers who are ‘short the gamma’ – meaning they’d need to buy more BTC when prices rise and sell more when prices fall – that volatility would be magnified.
BTC options have historically been driven by speculation rather than by risk management strategies that tend to diminish volatility. ‘We also thing that the derivatives market of BTC is certainly going to grow,’ added Park. Compared to traditional markets, like equities’ derivatives markets are 10 times as large as the spot market, but BTC derivatives currently make up only 3% of its spot value.
Park said as much as a 300 times increase in the size of the BTC derivatives market may be caused by the introduction of ETF options — enough to bring more liquidity, but also greater volatility brought on by speculative trades and leverage.
Still, Park concludes that BTC is evolving toward an asset class market structure with derivatives acting as tools for risk management and speculation.
