Recent SEC Approval of BlackRock’s Bitcoin ETF Options

The recent approval by the U.S. Securities and Exchange Commission (SEC) for BlackRock to list and trade options for its spot Bitcoin exchange-traded fund (ETF), the iShares Bitcoin Trust ETF (ticker: IBIT), has added a new layer of complexity to the cryptocurrency landscape, analysts say.

Impact on Physical Bitcoin Demand

CryptoQuant analysts have raised a crucial question: Could this shift lead to decreased demand for physical Bitcoin as more institutional traders turn to “paper” derivatives instead of directly investing in spot bitcoin ETFs?

They noted that the introduction of options on the IBIT ETF might increase the “paper” supply of Bitcoin, allowing institutional investors to gain exposure without direct purchases. This could potentially mean that the paper supply of Bitcoin increases, as institutional investors can engage in buying or selling without participating in the spot market.

Trends in Futures Market

They pointed to a significant trend in the futures market, where the paper Bitcoin supply surged from 279,000 to 549,000 BTC during the 2022 bear market. This increase in open interest indicates a growing preference for Bitcoin derivatives over the physical asset, as investors sought to short Bitcoin without directly participating in the spot market.

Parallels with the Gold Market

Derivatives trader Gordon Grant discussed the implications of this trend, drawing parallels with the gold market. He noted that although paper trading constitutes a substantial portion of total volumes, there remains a necessary physical demand underpinning this supply. Grant stated, “We see that while paper gold trading makes up a significant chunk of the total average daily volumes, so does spot.”

Grant emphasized that as Bitcoin integrates into traditional finance, its use as collateral becomes complex, explaining that Bitcoin isn’t readily accepted as collateral for North American regulated derivatives contracts. Participants will likely use U.S. dollars rather than Bitcoin for paper contracts, indicating a necessity for dollar-denominated transactions.

Expanding Bitcoin Market

Grant concluded that the overall market for Bitcoin products is expanding, with a growing share of Bitcoin derivatives within that market. He described a potential phenomenon of a “growing pie and growing pie share,” where the overall size of the Bitcoin market continues to grow in dollar or Bitcoin equivalent units.

He also expressed concerns that the price of options could be impacted by the new IBIT options product and its influence on implied volatility. Grant raised the possibility of a volatility squeeze, referencing past retail demand for options. “The real question for me is how bitcoin options markets, in terms of the price of optionality as measured by implied volatility, will digest a new source of activity and participatory interest,” he stated, noting concerns about the risk of a potential volatility squeeze in Bitcoin options due to heightened retail-driven demand.