Could BTC Spot ETF Options Shake Up the Crypto Market?

Seyffart is not alone in his high hopes. Another analyst, Eric Balchunas, shares this optimism, seeing the SEC’s commitment as a positive indicator for the market.

Nate Geraci, president of the ETF Store, also underlines that options trading already exists for some exchange-traded crypto derivative products (ETPs), which could pave the way for these new Bitcoin ETF options.

So what does all this mean for the market? Let’s explore this further and understand the potential implications of the emergence of Bitcoin ETF options.

Continued efforts to introduce options on Bitcoin ETFs

The story of Bitcoin in 2024 has been nothing short of exhilarating, not only in terms of its market presence, but also as a key political topic leading up to the US presidential election in November.

Against this backdrop, Spot BTC ETFs, launched in January 2024, have experienced explosive growth, amassing over $58 billion in assets under management (AUM) as of August 12, paving the way for something even more ambitious: the introduction of options on these ETFs.

In January 2024, three major US exchanges – the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE) and the Nasdaq – submitted applications to the SEC to list options on these spot BTC ETFs.

These requests were met with resounding silence from the SEC. Months passed without any response, leaving the exchanges and the market in a state of uncertainty.

The SEC’s initial response came in March, when it asked for more time to make a decision, followed by similar delays in April and July.

Things took a surprising turn on August 8, when all three exchanges – CBOE, Nasdaq and NYSE – suddenly withdrew their initial applications. The reason for this coordinated action remains unclear, but it is assumed that they received feedback from the SEC that led to this decision.

Notably, on the same day, CBOE filed an amended filing with the SEC. This new 44-page filing was much more detailed than the initial 15-page filing, addressing issues such as position limits and concerns about market manipulation, which suggests that these exchanges may have received comments from the SEC.

Despite this progress, there is no guarantee that the SEC will fully engage with exchanges on these issues. Analyst Seyffart even suggested that this could be another delaying tactic, which could push back the decision deadline to the end of April 2025.

Another development is on the horizon. Representatives from Nasdaq and BlackRock have asked the SEC to allow options trading on the iShares Ethereum Trust ETF, which is the only Ethereum-based ETF listed on the Nasdaq exchange.

This proposal, if approved, could expand the list of ETFs eligible for options trading, further expanding the scope of crypto-related financial instruments available on the market.

However, as with Bitcoin ETF options, a final decision on this application is not expected until April 2025.

Growing Demand for Bitcoin ETF Options

As Bitcoin continues to mature as an asset class, the demand for adding options to track BTC ETFs is increasing. But why?

Basically, options are contracts that give investors the right – but not the obligation – to buy (call option) or sell (put option) an asset at a predetermined price before a specific date.

In traditional finance, options are widely used to hedge risks, speculate on future price movements, and generate income through various strategies.

Let’s explore some benefits:

Risk management

One of the main reasons institutions want to see options tied to Bitcoin ETFs is the ability to manage risk more effectively.

For example, during sharp declines in the price of Bitcoin (such as the dramatic 50% drop in May 2021 or the recent “Crypto Black Monday” crash), investors could have used put options to protect their positions against heavy losses.

The ability to protect against volatility is essential for institutional investors who manage billions of dollars and need to protect their portfolios from sudden market fluctuations.

Improved liquidity

Another key benefit of introducing options into BTC ETFs is the potential increase in market liquidity. Historically, the launch of options trading on major assets has led to an increase in liquidity and trading volumes.

For example, the Chicago Mercantile Exchange (CME) observed this trend when it introduced Bitcoin options in January 2020.

If the same thing happens with BTC ETFs, it could make it easier for larger investors to enter and exit positions, reducing the risk of sudden price movements. Greater liquidity often attracts more participants, creating a more stable and balanced market.

Price discovery

Options markets are often considered a more efficient mechanism for price discovery, providing valuable information about investor sentiment and their expectations regarding future price movements.

For example, the increase in Bitcoin options trading on platforms like Deribit or Delta is giving the market a clearer picture of where investors think Bitcoin is heading.

If similar options become available for BTC ETFs, they could play a crucial role in helping investors understand and anticipate market trends.

The road ahead

If approved, these options could attract a wave of institutional investment, providing new tools to manage risk and profit from market fluctuations, potentially leading to increased demand for Bitcoin, pushing up prices and encouraging the creation of new financial products.

However, the SEC has been known to be slow to approve cryptocurrency-related innovations. Its repeated delays and requests for additional information have left the timeline uncertain. It remains to be seen whether these options will finally get the green light.