In November 2024, a significant moment in the evolution of institutional crypto trading occurred as options on U.S. spot bitcoin exchange-traded funds debuted on Nasdaq. The launch of these options for the iShares Bitcoin Trust (IBIT) and other spot bitcoin ETFs attracted remarkable first-day trading volumes, underscoring the growing interest from traditional financial players in digital assets.

On Nov. 19, options for the iShares Bitcoin Trust (IBIT) began trading, followed by five other spot bitcoin ETFs the next day. IBIT options alone generated $1.86 billion in notional trading volume on their first day, with over 80% of this activity driven by call orders. This strong demand signals robust investor confidence in bitcoin’s potential for further price appreciation.

Cryptocurrency derivatives trader Gordon Grant described the launch as a pivotal moment in the evolution of crypto derivatives. Grant highlighted that these options — particularly the iShares Bitcoin Trust (IBIT) options — have already reached daily volumes rivaling leading crypto-derivatives marketplace Deribit.

"IBIT options have already proven themselves to be a significant development in the evolution of crypto derivatives market liquidity," Grant told The Block. "Talking to top institutional players active in digital assets... the key takeaways for large, well-capitalized, and particularly North American players, are clear: obtaining directional leverage via derivatives on one of the world's leading liquid bitcoin access products is a gamechanger."

Trading volume for options on spot bitcoin exchange traded funds increased rapidly after their launch in late November. Image: Coinbase.

For institutional investors, the advent of spot bitcoin ETF options marks a critical step forward. Grant emphasized the advantages of operating within the regulated securities sphere, where trading and settlement are conducted in U.S. dollars through established broker-dealers, bypassing the need to interact directly with physical bitcoin.

“This allows corporations, funds, and family offices to interact directly with an accredited liquidity provider,” Grant noted. For large-scale investors, the added benefits of compliance, operational efficiency, and familiar reporting mechanisms cannot be overstated.

The timing of the launch coincided with bitcoin’s rally towards the $100,000 milestone, raising questions about the sustainability of the price surge. While some analysts attribute the rally to the options market's bullish sentiment, Grant pointed to broader market dynamics. “The options launch has indeed coincided with the crescendo of a secular upswing in the recalibration of the prospects for broader bitcoin adoption, friendlier regulatory regimes, and even a possible strategic bitcoin reserve,” he said.

He also highlighted the unconventional behavior of major market participants. Miners such as Marathon Digital, traditionally sellers, are now buying bitcoin at high prices, mirroring the playbook of Michael Saylor’s MicroStrategy. The firm recently disclosed acquiring 50,000 BTC over a six-day period, which coincided with a 25% price increase.

“This mental model has served as a fresh impetus for leveraged long exposure to bitcoin," Grant explained. "Game theoretically... the efficient behavior is not to sell but rather to run ahead of those anticipated buys.”

One of the most significant potential impacts of ETF options is their ability to influence bitcoin's notorious price volatility. While many analysts believe options could help stabilize the market over time, Grant cautioned that initial conditions suggest otherwise.

“We’ve seen a meaningful expansion of implied volatility in dollar-denominated bitcoin options, with contracts out to January 2027 priced over 85% implied volatility,” Grant said. He noted that this level of volatility is in the upper decile for longer-tenor bitcoin options and reflects the nascency of the product and ongoing price discovery.

Grant identified structural challenges, including low interoperability between bitcoin and dollar collateral, as a key hurdle. However, he expressed optimism that the prospect of selling high-premium options could attract liquidity providers over time, potentially leading to a decline in volatility levels, at least towards levels observed on Deribit. "The market certainly today is not suggesting volatility is likely to decline soon, but it is also fair to say this is a new product and price discovery is apt to remain an ongoing process," he added.

The launch of spot bitcoin ETF options also represents a significant step toward mainstream financial integration for bitcoin. Coinbase Research highlighted that iBit options accounted for 96% of the market’s volume on their first day, underscoring their dominance.

With $47.5 billion in assets, the iShares Bitcoin Trust leads the market, dwarfing its nearest competitor, the Grayscale Bitcoin Trust. The bullish sentiment is reflected in a 3.1:1 ratio of call to put open interest, with 87% of the volume centered on calls.

Options are more than just trading tools; they enable sophisticated risk management strategies and cost-effective exposure. As the first U.S.-regulated options on spot bitcoin products, these instruments could provide a new vector for positioning, which could be transformative for the broader market in the long term.

“For the preponderance of folks steering capital at scale within a dollar-as-numeraire construct, it is difficult to overestimate just how crucial these new options features are to the bitcoin market," Grant said.

Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. The Block continues to operate independently to deliver objective, impactful, and timely information about the crypto industry. Here are our current financial disclosures.

© 2024 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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