Potential bitcoin ETF options could transform crypto trading and squeeze prices higher

By Frances Yue

Crypto bulls expect the potential approval of options on bitcoin ETFs to allow institutional investors to execute more strategies, including some that may lead to bitcoin's price much higher.

Investors are closely watching if and when the Options Clearing Corp. and the Commodity Futures Trading Commission will greenlight options on iShares Bitcoin Trust ETF IBIT, after the U.S. Securities and Exchange Commission last month approved Nasdaq Inc.'s application to list such products. Other exchanges have also filed applications to list options on iBiT and other spot bitcoin ETFs.

While many crypto options products already exist in the market, they are lightly regulated, or even unregulated and that has hindered some institutions from trading them due to compliance requirements.

If options on bitcoin (BTCUSD) ETFs are approved, it will allow more institutional investors to utilize such instruments to execute different strategies, according to Eliézer Ndinga, head of strategy and business development of digital assets at 21Shares.

For example, investors will be able to implement covered call strategies, where an investor who holds a long position in an asset sells call options on it to generate income, Ndinga said in a phone interview.

A call option gives the contract owner the right, but not the obligation to buy the underlying asset at a specified price by the expiration date.

Meanwhile, if options on bitcoin ETFs arrive, investors may at some point expect a so-called gamma squeeze, which tends to happen when there's extensive buying activity of an asset in a short period of time. It occurs when institutions selling those call options buy the underlying assets to hedge their position. As the price of the asset rises, they have to buy more to maintain their hedge, pushing the asset even higher.

In 2021, shares of GameStop (GME) soared following a gamma squeeze of the stock.

A gamma squeeze could have a more profound impact on bitcoin than on traditional assets, according to Jeff Park, head of institutional strategies at Bitwise Asset Management.

"Technically, stocks and bonds and traditional assets have a valuation framework that provides a sense of gravity," Park said in a call. However, it doesn't apply to bitcoin, noted Park.

"Equities technically can't be squeezed forever, because at some point, either companies will issue new shares, because they think it's valuable to do so, or short sellers will come in and put it back into the right price. Bitcoin will not have any of those dynamics, which really means that sky's the ceiling," Park said.

Still, it remains a question how popular covered calls using options on bitcoin ETFs would be, Park said. For the current crypto options market, "you don't see a lot of crypto native whales actually selling covered calls against their positions to monetize it at all," noted Park.

Darius Tabai, chief executive at decentralized exchange Vertex, said a large-scale gamma squeeze is unlikely to happen on bitcoin.

Such a phenomenon happened to meme stocks such as GameStop as there are no futures contracts on them, which makes them hard to short. However, bitcoin futures are very well developed. "You can short very easily without getting squeezed out. That kind of breaks the logic of gamma squeeze," Tabai said.

-Frances Yue

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10-01-24 1115ET

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