Original Title: How Will Bitcoin ETF Options Impact Bitcoin’s Price?

Original Author: Dave Birnbaum

Compiled by: Koala, Mars Finance

BlackRock ETF and Index Investments Chief Investment Officer Samara Cohen walks into Time Magazine

Last month, the U.S. Securities and Exchange Commission (SEC) approved Nasdaq ISE to list and trade options on BlackRock's iShares Bitcoin Trust (IBIT), marking an important step towards introducing regulated Bitcoin options to the U.S. market.

While most retail investors holding Bitcoin may not use this financial tool, its availability in the U.S. could influence Bitcoin's adoption, liquidity, and volatility.

This development is expected to further integrate Bitcoin into the global financial system, supporting the continued growth of the Bitcoin network—and it will forever change how Bitcoin is used as part of an overall investment portfolio.

Similar financial instruments have existed for some time, but until now, they were only available on platforms outside the U.S., such as Deribit. However, the SEC's approval of IBIT options means that U.S. investors will be able to access these contracts within a regulated framework.

For a long time, the U.S. has been considered a leader in the global financial arena, with the largest and most liquid stock and bond markets, as well as a wide variety of financial instruments and a diverse investor base. By approving Bitcoin ETF options in these markets, regulators will allow Bitcoin investors to use powerful financial tools to manage risk and exposure like never before.

Furthermore, as institutional participants such as hedge funds and pension funds begin utilizing Bitcoin options, market liquidity will naturally increase, making large trades easier to execute without disrupting asset price stability.

What Are Bitcoin ETF Options?

Bitcoin options are contracts that give the holder the right to buy or sell Bitcoin at a predetermined price within a specified period, but not the obligation. For institutional investors, these options provide a means to hedge against price fluctuations or speculate on market movements without holding the underlying asset.

Through options trading, investors can now more effectively hedge Bitcoin risk or potentially amplify returns through leverage. This flexibility may attract more types of participants, providing a new way to gain exposure to Bitcoin price risk without having to directly purchase the asset itself.

In the future, regulated Bitcoin options in the U.S. might lead to a significant increase in their synthetic nominal value, which refers to the total value of outstanding derivative contracts in the market. As options trading expands, the notional value tied to Bitcoin may significantly increase without the need to buy or sell physical Bitcoin. This opens a new avenue for market participation while expanding Bitcoin's influence in the global economy.

How Do Bitcoin Options Work?

IBIT options will adhere to existing ETF options trading rules, including listing standards, margin requirements, and trading halts, to ensure they seamlessly integrate into the broader financial system.

The approved rules include strict position and exercise limits, setting a position cap of 25,000 contracts. Compared to other ETFs, this limit is notably conservative (with some ETFs having caps of up to 250,000 contracts), aimed at minimizing the risk of market manipulation.

Additionally, the SEC and Nasdaq ISE have implemented strong monitoring and reporting mechanisms to ensure careful oversight of transactions to detect any signs of fraud or manipulation.

The regulatory framework also includes monitoring access to the Chicago Mercantile Exchange Bitcoin futures market, providing real-time oversight, tracking highly correlated futures and spot markets.

These options will be physically settled and follow an American exercise method, meaning they can be exercised at any point before expiration.

How to Use Bitcoin Options to Hedge Risk

Bitcoin options provide a complex method for managing risk and hedging against volatility. A common hedging strategy is to purchase put options, which gives you the right to sell Bitcoin at a predetermined price (strike price) within a specific timeframe. This can help you guard against potential declines in Bitcoin's price.

For example, if you hold a large amount of Bitcoin and are concerned about a short-term price drop, you can purchase put options. If Bitcoin's price falls below the strike price, you can exercise the put options, allowing you to sell Bitcoin at a higher strike price and limit your losses.

On the other hand, call options are used to hedge missed opportunities or upside potential. By purchasing call options, you gain the right to buy Bitcoin at a specified price when the market value rises, allowing you to participate in the gains without being fully exposed to the asset's volatility upfront.

Both strategies allow you to manage your Bitcoin positions more precisely without being forced to sell the underlying asset during economic downturns or miss potential profits during uptrends.

Liquidity and Its Impact on Bitcoin Volatility

The introduction of Bitcoin ETF options is expected to impact its price volatility due to enhanced liquidity.

When market liquidity is high, larger trades can be executed without significantly affecting asset prices. This is because higher liquidity means there are more buyers and sellers at any given time, thereby diminishing the impact of any single transaction on the entire market.

In the context of Bitcoin, options provide institutional investors with tools to hedge positions or take on risk in a controlled manner, leading to more frequent but less disruptive trading activity.

Moreover, the presence of options increases the number of market participants, each adopting different strategies from hedging to speculation, which enhances the complexity of price discovery. Consequently, liquidity is distributed more evenly across the market, reducing sharp price fluctuations driven by low trading volume.

A New Era for Bitcoin in the U.S. Market

The SEC's approval of Bitcoin ETF options indicates that Bitcoin is becoming increasingly popular within the regulated financial system. As institutions gain access to more regulated financial products including Bitcoin, it will continue to mature and integrate into the financial system.

As institutional adoption increases, the future of Bitcoin looks bright. With more funds and institutional participants entering the options market, Bitcoin's liquidity and market stability may improve, making it a more attractive asset for conservative investors. This will expand the inflow of institutional capital, further smoothing Bitcoin's historically volatile price fluctuations and encouraging broader participation.