The U.S. Securities and Exchange Commission (SEC) has approved listing physically settled options for BlackRock’s spot Bitcoin ETF, the iShares Bitcoin Trust (IBIT). This move is viewed as a significant development for the cryptocurrency market, with some anticipating major changes.
However, before these options can reach the market, they require clearance from the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC). The anticipation surrounding these approvals generates mixed reactions, with some forecasting increased market stability while others are concerned about potential spikes in volatility.
Potential for a gamma squeeze in Bitcoin
Experts believe introducing IBIT options could trigger a gamma squeeze similar to the one seen with GameStop in 2021. A gamma squeeze occurs when the market dynamics force traders to buy more of an asset due to the rising price of call options. This upward price movement can become self-perpetuating as market makers hedge their positions by purchasing more of the asset, increasing its price.
Bitwise Asset Management has suggested that the Bitcoin options tied to IBIT could lead to rapid price increases. This type of market event is reminiscent of the explosive rise in GameStop’s stock price, which saw traders continuously buying as the price soared.
Mechanics behind the gamma squeeze
Options give traders the right to buy or sell an asset at a predetermined price before a specific date. A call option allows traders to bet on a price increase, while a put option is a bet on a price decrease. Gamma measures how much the price of an option changes with each $1 increase in the underlying asset.
When large amounts of call options are purchased, market makers who are short on calls must buy the underlying asset to hedge their positions. As Bitcoin’s price rises, they need to buy more, pushing the price higher and creating a loop that continues the upward trend.
According to Jeff Park from Bitwise Asset Management, Bitcoin options have “negative Vanna,” which means that as Bitcoin’s spot price increases, volatility rises even faster. This situation forces dealers to continue buying as prices increase, leading to an exponential rise in value.
Institutional demand and the impact on Bitcoin’s supply
BlackRock’s IBIT options are expected to attract significant institutional demand, offering a regulated way to gain exposure to Bitcoin. Historically, institutions have been cautious about Bitcoin due to concerns like counterparty risk, also known as “jump-to-default” (JTD). However, the regulated nature of these options may ease those worries, potentially drawing more institutional investors into the market.
Park expects a growing demand for long-duration, out-of-the-money (OTM) call options. He believes investors will find value in these options because they allow for a substantial upside without requiring large amounts of capital. This preference for options over direct ownership could become more prevalent among institutions.
With Bitcoin’s fixed supply of 21 million coins, any increase in demand, especially from institutional investors, could profoundly affect its price, potentially leading to more pronounced price movements than those seen in traditional financial assets.
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