The CME futures market will evolve with derivatives, as the operator announced January 13 as the launch date for options on Bitcoin (BTC) futures. Options are creating a new layer of complexity on the BTC market, and inviting new potential classes of investors.
Bitcoin Options Offer Time Window to Buy Futures
Options on BTC futures are a new financial tool, with more exchanges potentially coming on board in the coming months. Bitfinex, once a spot market leader, is ready with its version of derivatives. Bakkt, the ICE market, has scheduled options for December 9. Binance also has a limited offering through Binance JEX, a recently acquired trading platform.
Buying a futures contract means an obligation to settle at some point, whether in cash or by taking physical delivery. An option is more complex – it offers the right, but not the obligation to buy a futures contract at a certain price during a certain time period. Options either expire, or are settled in the underlying futures contract.
Buying an option thus offers a way to avoid exposure during unfavorable times. Options also offer a way to get exposed to an asset while only keeping a small margin for the trades. But risk mitigation won’t come for free. A BTC option would have a specific premium based on the volatility of the underlying asset.
Crypto Exchanges May Push for Options Markets
Beyond CME, a wave of options offering is also expected on crypto-to-crypto exchanges, which already have the technology to offer futures. The effect of options on the price of BTC may be noticeable, analysts believe. The balancing effect of options trading may further decrease volatility.
So far, BTC has only seen the extremely risky binary options, which bet on the immediate price movement of the asset. The new drive is to build call and put options markets, both on mainstream platforms and through already established crypto-to-crypto exchanges.
Spot market is less volatile after derivatives trading (CME,Bitmex,Binance, Bakkt…) due to the decreased level of information flow to the market. In addition to futures trade of options might decrease volatility of the spot market: pic.twitter.com/caf9iK8wDI
— Bitcoin Theory (@TheoryBitcoin) November 12, 2019
The CME has already grown its volumes significantly, to above 32,000 BTC per day. The futures market is about to turn two years old, and has been viewed as one of the factors potentially directing the Bitcoin price beyond spot trading.
The Bakkt physical delivery futures are still building up volumes, with growth in the past days.
∙ Today’s volume so far: 1415 BTC ($12,409,550)
∙ Last traded price: $8,770
∙ Trading day progress: 83%
∙ Current daily Bakktarget™: 1522 BTC ($13,345,660)
— Bakkt Volume Bot (@BakktBot) November 13, 2019
Even at those volumes, Bakkt prepares to launch options on futures this December 9. BTC futures markets have managed to attract well-funded entities with good understanding of the markets, recently commented Chris Giancarlo, former Chairman of the Commodities Futures Trading Commission. Options may allow miners to hedge the risk of selling their coins at the right price, to finance hashing operations, machines, and electricity costs.
A direct speculation in spot prices has been possible for BTC for years. There is evidence that a single “whale” could have swayed the markets on multiple occasions in the past. But mainstream BTC derivative markets offer artificial limits on volatility, thus “taming” wild BTC price moves. The effect of futures on BTC could have potentially decreased volatility, and options may further add to a tamer spot market.
What do you think about options on BTC futures? Share your thoughts in the comments section below!
Images via Shutterstock, Twitter @BakktBot @TheoryBitcoin