Bitwise: Why the approval of BTCSpotETF options will lead to a big pump in coin price

This Friday, the US SEC approved the listing of options products for the iShares BTC ETF (IBIT) by BlackRock on Nasdaq. The trading platform will handle BTC ETF options similar to other ETF options, following the same rules and trading procedures.

Bitwise Alpha Strategy Manager Jeff Park posted a lengthy article on social media praising the approval, stating that “this marks the most significant progress that the cryptocurrency market may achieve.” He believes that some of the special properties of BTC, under the rules of the regulated options market, will lead to an explosive pump in the coin price. The following is the full compilation and translation by BlockBeats:

With the approval of BTC ETF Options listing and trading by the United States Securities and Exchange Commission today, I believe we are about to witness the most extraordinary ‘Volatility’ in financial history. I think this is worth a more comprehensive explanation, so I want to emphasize some characteristics of BTC, the nature of the regulated Options market, and the powerful combination of the two. It is no exaggeration to say that this marks the most significant progress that the Cryptocurrency market may achieve.

For the first time in history. The nominal value of BTC will be partially deposited in the bank through ETF Options. How can this be explained? Although BTC’s non-custody and limited supply are its greatest advantages, they are also a drag, limiting its ability to create synthetic leverage. Despite Deribit’s efforts, it has never fully addressed the issues of widespread adoption, counterparty and capital efficiency matrix. And CME Futures Options require too much active management. Now, BTC will have a regulated market for the first time, with OCC protecting clearing members from counterparty risk. This means that BTC’s synthetic nominal exposure can rise exponentially without generating JTD risks that would deter investors. In a Liquidity-driven world, leveraging to unlock synthetic flows represents the greatest opportunity for BTC ETF, enhancing their financial utility compared to the Spot market.

In addition, for the first time, BTC can now offer maturity as part of the leverage calculation. retail investors have embraced Perpetual Options for leverage, but these instruments are not perfect and are more akin to a series of daily 0DTE Options that must be rolled over continuously. With BTCSpot ETF Options, investors can now place period-based portfolio allocation bets. Especially for the long term. Holding long-term OTM bullishOptions as a premium payout is likely to give investors more returns than fully collateralized positions. People often compare BTC to bullishOptions because of its declining premium and the occasional explosive pump. Now, investors can bet on the “pump of volatility” at the same or lower premium, while gaining more delta over a longer time horizon – an attractive opportunity.

BTC also has unique Volatility characteristics, one of the most important being the “Volatility Smile”. Most stocks/indices exhibit a “Volatility skew”, where upward Volatility is cheaper than downward Volatility (i.e., protection is more expensive than speculation). What sets BTC apart is that the pump and the drop are equally frequent, so the market demands risk premiums from both sides. Historically, for call Options, as the Spot price pumps, the implied Volatility tends to decrease. Therefore, although Options delta increases (becomes more ITM), the growth rate slows down - this is positive vanna (dA/dvol), which creates some resistance. However, BTC Options have a negative vanna: as the Spot price pumps, Volatility also rises, meaning the delta increases faster. When short gamma traders hedge against this (gamma short squeeze), the situation with BTC becomes explosively recursive. More pumps will lead to more pumping space, as traders are forced to continue buying at higher prices. Negative Vanna Gamma short squeeze is like a rocket.

BlockBeats Note: Options smile is also known as Volatility smile, which describes the relationship between implied volatility and strike price of Options. The reason it is called ‘Volatility smile’ is that the volatility of out of the money and in the money Options is higher than that of at the money Options, resulting in a volatility curve that presents a upward half-moon shape with lower middle and higher sides, resembling a smiling mouth, hence the name smile Options.

The key factor that ties all of this together is that BTC itself cannot be diluted to accommodate this newfound leverage. Compare it to stocks like GME or AMC. Management can issue new shares to take advantage of pricing anomalies, thus limiting the pump in stock prices. BTC can never do this. Readers may ask, ‘But what about commodities like oil or gas? Aren’t they comparable? If so, why is BTC different?’ The key difference is that most physical commodities have expiration dates, which means they tend to trade in the futures market rather than the spot market. Unlike the spot market, the total exposure and nominal exposure of the futures market vary based on expiration dates and net interest in physical and paper, so they do not allow for directional participation (i.e., people trading longs and shorts simultaneously on the curve, as well as physical and paper trades). Additionally, these markets are also subject to supply manipulation by organizations like OPEC.

In conclusion, the BTC ETF Options market is the financial industry’s first regulated leverage on truly permanently restricted commodities. Things could get crazy. In this case, the regulated market may close.

But what sets BTC apart is the parallel, unshuttable Decentralization market, unlike GME.

This will be incredible.