James Richardson
The recent decision by the U.S. Securities and Exchange Commission (SEC) to allow BlackRock to list and trade options for its spot Bitcoin exchange-traded fund (ETF), the iShares Bitcoin Trust ETF (ticker: IBIT), has introduced new complexities to the cryptocurrency market, according to analysts.
CryptoQuant analysts raised an important concern: could this lead to reduced demand for actual Bitcoin, as institutional traders might increasingly prefer derivatives over direct investments in spot Bitcoin ETFs?
They observed that offering options on the IBIT ETF could expand the “paper” supply of Bitcoin. This would enable institutional investors to gain exposure to Bitcoin without purchasing it directly. “Options on spot bitcoin ETFs could mean that the ‘paper’ supply of Bitcoin will increase,” CryptoQuant analysts explained. “This allows institutional investors to take long or short positions on Bitcoin without interacting with the spot market.”
They highlighted a broader trend from the 2022 bear market when the “paper Bitcoin” supply in the futures market jumped from 279,000 to 549,000 BTC. This increase reflected a growing preference for Bitcoin derivatives, as many investors looked to short Bitcoin without engaging directly in the spot market.
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Derivatives trader Gordon Grant weighed in, comparing Bitcoinโs market trajectory to gold. He explained that while “paper” trading, or derivatives, makes up a significant portion of the trading volume in gold, physical demand remains essential. “Although paper gold trading dominates volumes, physical demand is still a key factor supporting this activity,” he noted.
Grant emphasized that as Bitcoin becomes more integrated into traditional finance, its role as collateral becomes more nuanced. Unlike conventional assets, Bitcoin is not as widely accepted as collateral in North American regulated derivatives contracts. “Bitcoin isn’t easily used as collateral to gain leverage, which complicates the creation of paper contracts backed by Bitcoin,” he explained.
This results in participants using U.S. dollars instead of Bitcoin for these contracts, reflecting the liquidity and regulatory preferences. “In the case of IBIT options, participation will require U.S. dollars, not Bitcoin itself,” Grant pointed out.
He also remarked that the market for Bitcoin-related products is expanding, with derivatives taking an increasing share of that growth. “We could see both the total size of the Bitcoin market and the portion held by derivatives grow over time,” he said.
Additionally, Grant raised concerns about how the introduction of IBIT options might influence the pricing of options and implied volatility. He warned about the possibility of a volatility squeeze if retail demand for Bitcoin options spikes, drawing parallels to past instances such as GameStop and Ethereumโs price surge during the EIP 1559 upgrade. “The key question is how the Bitcoin options market, measured by implied volatility, will respond to this new activity,” Grant concluded.
