Written by: Alvis, Mars Finance
The Bitcoin market has reached a milestone as BlackRock’s iShares Bitcoin Trust (IBIT) ETF options will officially go live on Nasdaq today.
After several months of regulatory advancement and repeated consultations, the Options Clearing Corporation (OCC) recently updated relevant documents and approved the inclusion of this $43 billion financial product in the trading scope, marking the acceleration of the financialization of Bitcoin.
Source: OCC
Not long ago, BlackRock withdrew its ETF application, but now, this option transaction has been successfully approved in September, and the Securities and Exchange Commission (SEC) also approved the relevant rule changes during the same period. In addition to BlackRock, other blockbuster products in the Bitcoin field have also begun to gain favor in the options market, including Grayscale Bitcoin Trust (GBTC) and Bitwise Bitcoin ETF (BITB), which have already received support for options trading. Market giants such as Cboe and Fidelity have also joined the race, providing more opportunities for participation in the Bitcoin market.
But the question is: what does the launch of these ETF options mean? Will it completely change the price trend of Bitcoin and set off a revolution in the global financial system? At this critical juncture, let us review history and explore the far-reaching impact behind this financial instrument innovation in combination with the uniqueness of the Bitcoin market.
The significance of Bitcoin ETF options
1. Basic functions and effects of ETF options
First, we need to understand what ETF options are. ETF (Exchange Traded Fund) options are a derivative trading tool that gives investors the right to buy or sell a specific ETF fund share at a predetermined price at a specific point in time. Similar to traditional stock options, ETF options allow investors to use leverage to speculate or hedge risks in the market. Simply put, ETF options are a derivative based on ETFs, which provide investors with more investment strategy options, including hedging, speculation, arbitrage, etc.
For the Bitcoin market, the introduction of ETF options not only increases the diversity of investment tools, but also injects more liquidity into the market. This increase in liquidity can not only stimulate market activity, but also alleviate the volatility of the Bitcoin market to a certain extent through hedging transactions. Specifically, the introduction of ETF options will bring more market participation opportunities to institutional investors. They can use option tools to predict and manage the fluctuations of Bitcoin prices, thereby balancing risks and obtaining excess returns.
For example:
Suppose you buy an option on a Bitcoin ETF that gives you the right to buy the Bitcoin ETF at $50 per unit on a future date. If the market price of the Bitcoin ETF rises to $60 on that date, you can exercise your option to buy the ETF at $50 and then immediately sell it at the market price of $60, making a profit of $10.
However, if by that date the ETF price only rises to $55 or falls, there is no need to exercise the option because you can choose not to exercise the option (which is like giving up the deposit you have already paid). Therefore, options give you flexibility and the opportunity to manage risk.
The difference between ETF and ETF options:
ETF: An investment tool, essentially a fund that can be bought and sold on a stock exchange, usually tracking the performance of a certain asset class (such as Bitcoin, gold, S&P 500, etc.). Buying an ETF means you buy a basket of assets contained in the fund, which can be sold at any time. Investors gain market performance of assets in this way.
ETF options: are derivatives that do not directly represent the ETF itself, but give you the right to buy or sell the ETF in the future. An option is a contract that allows but does not force you to buy or sell an ETF at a certain time in the future at an agreed price. This means that the value of an option depends not only on the price changes of the ETF, but also on factors such as the expiration date and exercise price of the option.
Key Differences:
Different nature of holding: Buying an ETF means you directly hold the assets of the fund, while ETF options are only a "purchase" right, not the asset itself.
Risk and return mechanism: The risk and return of ETFs are directly linked to market prices (if the price goes up, you make money, if it goes down, you lose money), while ETF options involve the issue of whether to execute or not, and there are time limits. The option fee (option premium) you pay is the maximum loss you can bear, while the potential gain can be huge (for example, when the ETF price goes up).
Different purposes of use: ETFs are usually long-term investment tools used to track the overall performance of assets; while ETF options are more often used for short-term trading, risk hedging or strategy enhancement.
How the options market affects Bitcoin prices
1. Improved liquidity
The addition of the options market will inevitably increase the liquidity of funds in the Bitcoin market. Liquidity is generally considered one of the important indicators of the health of the financial market. Options provide investors with more trading opportunities, especially attracting a large amount of institutional funds to participate in the market. Institutional investors are usually more inclined to use options tools to hedge market risks than retail investors, which has diversified the structure of Bitcoin market participants and promoted capital inflows. This liquidity of funds can not only increase the activity of the market, but also enable Bitcoin prices to gain more buying support when they rise, thereby avoiding drastic fluctuations caused by market panic or selling.
2. Hedging and stabilizing effects
The introduction of options instruments, especially ETF options, means investors can better hedge against the volatility of the Bitcoin market. As an emerging asset, Bitcoin has always been known for its high volatility, and violent price fluctuations have discouraged many investors. The existence of the options market provides investors with tools to avoid this risk. Investors can hedge against market downside risk by buying put options, or share in the gains from rising markets through call options. The increase in these hedging behaviors may reduce the volatility of the Bitcoin market and stabilize the market. Especially in the face of capital inflows, this hedging behavior has the potential to amplify the upward trend and promote steady growth in Bitcoin prices over the long term.
3. Speculation and leverage
In addition to hedging risks, ETF options also provide investors with opportunities for speculation. Through options, investors can use relatively less capital to obtain greater market returns through leverage. This leverage effect can both amplify returns and risks, but its impact on the market cannot be ignored. Since options trading allows investors to control larger positions, it may lead to stronger market reactions, especially when prices break through key technical levels. Bitcoin's price volatility is already high, and the addition of the options market may increase the short-term volatility of the market, but it can also stimulate more speculative capital inflows, thereby driving up prices.
Lessons from the past for gold ETF options: moderate rise or large fluctuations?
In 2004, the gold market welcomed the launch of ETF options. At that time, the price of gold fluctuated between $400 and $420. After the option was launched, the price of gold did not rise explosively immediately, but maintained a moderate increase within three months.
By mid-2005, the price of gold easily broke through $450 and then went straight to $700, setting a new high.
Although there were no drastic fluctuations at the beginning, in the long run, the introduction of options injected more liquidity into the market, attracted a large number of investors, and drove the continued rise in gold prices.
Therefore, the launch of gold ETF options did not have an immediate effect, but rather brought about a gradual market reaction, gradually pushing up the price of gold. This seems to be somewhat similar to the Bitcoin market today.
Bitcoin ETF options: The "golden age" or "short-term hype" of the cryptocurrency market?
You may ask: "Will it become a driving force for the market like gold this time?" The answer may be yes, but we need to look at the specific effects in stages.
Short term (1-3 months): Volatility is still the main factor
First of all, we need to realize that the volatility of the Bitcoin market is much greater than that of gold. Gold is regarded as a safe-haven asset during global economic turmoil, while Bitcoin, as a decentralized digital currency, is still in a relatively immature market. The price of Bitcoin is often affected by multiple factors such as macroeconomics, policy changes, and investment sentiment, which leads to more drastic price fluctuations.
Even so, the launch of ETF options will inject more liquidity into the Bitcoin market and attract more institutional investors to participate. The launch of Bitcoin ETF options means that institutional investors can hedge risks, conduct strategic trading, and even speculate more flexibly. Although these operations will not immediately bring about an explosive rise, the market's activity and liquidity will inevitably increase. The price of Bitcoin may rise moderately, but the volatility in the short term will still be very sharp, and the price may hover between $85,000 and $10,000.
Medium term (6 months to 1 year): Market confidence explodes
In the medium term, the launch of Bitcoin ETF options may play a catalytic role. The launch of gold ETF options has expanded the investor group in the gold market and gradually pushed up prices. For Bitcoin, the participation of institutional funds is undoubtedly a strong support for the market. The participation of institutional investors can not only stabilize market sentiment, but also bring more speculation and hedging demand to the Bitcoin market.
If we look at it over a longer period of time, we may find that there is room for Bitcoin to rise, especially if market confidence explodes. The $100,000 mark is a very critical psychological price, and with the continuous influx of institutional investors, the possibility of this breakthrough is gradually increasing. If the global economy experiences inflation, the dollar weakens, or economic uncertainty intensifies, Bitcoin's attributes as a safe-haven asset will be recognized by more people, and the price will rise more strongly.
Conclusion: The new era of Bitcoin brings both opportunities and challenges
The launch of BlackRock Bitcoin ETF options marks a key step for Bitcoin to move towards the mainstream financial system. This not only injects unprecedented liquidity into the market, but also enables institutional investors to flexibly deal with risks through options tools, thereby promoting the depth and stability of the market. As more and more institutional funds flow in, the market structure of Bitcoin will become more mature, volatility will be effectively managed, and market confidence will be further enhanced.
Looking back at the history of gold ETF options, it has injected huge capital flows and stability into the gold market, driving long-term price increases. Similarly, with the full launch of Bitcoin ETF options, the market's recognition and demand for Bitcoin will be further enhanced, and the possibility of breaking through $100,000 is also gradually increasing. Bitcoin is not only digital gold, its decentralized nature and anti-inflation properties will make it a more robust safe-haven asset in the global economic turmoil.
