Bitcoin ETF Options May Increase ‘Virtual’ Supply, Highlighting Market’s Preference for Derivatives Over Physical Assets

• The introduction of IBIT ETF options could increase Bitcoin’s “virtual” supply as institutional investors gain exposure without direct purchase.
• CryptoQuant analysts highlight that Bitcoin spot ETF options might imply a rise in Bitcoin’s ‘virtual’ supply, allowing investors to hold long or short positions without physical Bitcoin.
• This surge in positions suggests a preference for Bitcoin derivatives over physical assets, as evidenced by the increase during the 2022 bear market, as noted by CryptoQuant analysts.

The rise of IBIT ETF options is poised to significantly impact Bitcoin’s market dynamics, attracting institutional interest and altering the demand-supply equation.

Surge in Bitcoin ‘Virtual’ Supply during 2022 Bear Market

The remarkable increase in ‘virtual’ Bitcoin supply from 279,000 to 549,000 units during the 2022 bear market highlights a major shift towards derivatives. Investors seem to prefer engaging in derivatives trading to gain or hedge exposure to Bitcoin without transacting in the spot market. This trend underscores the growing appeal of Bitcoin derivatives over physical ownership.

The Role of ‘Virtual’ Transactions and Physical Demand

Derivatives trader Gordon Grant compares this phenomenon to the gold market, where ‘virtual’ trading forms a large portion of overall volume, yet physical demand remains necessary to support the virtual supply. This analogy helps explain the necessity of a physical Bitcoin foundation, despite the growing prominence of virtual transactions in the market.

The Complexity of Using Bitcoin as Collateral in Traditional Finance

Grant further elaborates on the complexities of incorporating Bitcoin into traditional financial products. Unlike traditional assets, Bitcoin poses challenges in being used as collateral for derivative contracts due to its nature as a digital asset. Consequently, participants often rely on USD rather than Bitcoin for these virtual contracts, which reflects the liquidity and acceptance of the dollar in conventional markets.

The Expanding Bitcoin Derivatives Market

The overall Bitcoin market is expanding, with a growing share attributed to Bitcoin derivatives. This market expansion is marked by increased average daily trading volumes across spot, futures/linear derivatives, and options/non-linear derivatives, whether measured in USD or Bitcoin equivalent units. Such growth indicates a persistent rise in interest and transactions within the Bitcoin derivatives landscape.

Impact on Bitcoin Options and Volatility

New IBIT options are expected to influence implied volatility and option pricing. Grant expresses concern over potential volatility squeezes if retail-driven demand for Bitcoin options surges, similar to past events with GameStop and Ethereum during the EIP 1559 upgrade. The market’s ability to digest new sources of activity and interest will be crucial in maintaining stability in Bitcoin options pricing.

Conclusion

The advent of IBIT ETF options signifies a transformative phase for Bitcoin, particularly in institutional engagement and market structure. As the landscape evolves, the growing preference for derivatives over physical assets, coupled with the complexities of using Bitcoin as collateral, will shape Bitcoin’s future trajectory. The sustained expansion of the Bitcoin derivatives market and its impact on implied volatility will be pivotal considerations for investors.