Could spot BTC ETF options turn the crypto market on its head?

Why is the SEC’s decision on Bitcoin ETF options so important? Could this be the move that will finally legitimize Bitcoin in the eyes of traditional finance?

After months of anticipation, momentum behind options on spot Bitcoin (BTC) exchange-traded funds is finally picking up. What once seemed like a distant prospect is now gaining traction among regulators, thanks to the surge in interest in spot Bitcoin ETFs.

The options could come to market in the fourth quarter of 2024 at the earliest, according to Bloomberg analyst James Seyffart, with the U.S. Securities and Exchange Commission expected to make a key decision by Sept. 21.

Seyffart isn’t the only one with high hopes. Another analyst, Eric Balchunas, shares the optimism and sees the SEC’s involvement as a positive indicator for the market.

Just like “SEC comments” are a good sign for our ETF approval rates, we think it’s a good sign here. Because why bother if they’re just going to reject it outright? https://t.co/CPAOl5eU3f

— Eric Balchunas (@EricBalchunas) August 8, 2024

ETF Shop President Nate Geraci also pointing It has been noted that options trading is already available for some crypto derivative exchange-traded products (ETPs), which could pave the way for new Bitcoin ETF options.

So what does all this mean for the market? Let’s dive deeper into this and understand the potential impacts of Bitcoin ETF options coming to life.

Ongoing efforts to offer options on Bitcoin ETFs

Bitcoin’s story in 2024 has been exciting not only in terms of its presence in the market but also as a major political issue in the run-up to the US presidential elections in November.

Amidst all this, spot BTC ETFs, which launched in January 2024, have seen explosive growth, reaching over $58 billion in assets under management (AUM) as of August 12, paving the way for something even more ambitious: the introduction of options on these ETFs.

In January 2024, the three major U.S. stock exchanges—the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE), and Nasdaq—filed a request with the SEC to list options on these spot BTC ETFs.

These requests were met with a resounding silence from the SEC. Months passed with little to no feedback, leaving exchanges and the market in limbo.

The SEC’s initial response came in March, asking for more time to make a decision, followed by similar delays in April and July.

Things took a surprising turn on August 8 when all three exchanges (CBOE, Nasdaq, and NYSE) suddenly withdrew their initial filings. The reasoning behind this coordinated move remains unclear, but it is possible that they may have received some feedback from the SEC that led to this decision.

I don’t know if I’ve done something unlucky. But three exchanges have withdrawn their applications to list the spot #Bitcoin ETF options since I tweeted this.

I won’t comment too much for now. I think the important ones are the ones that list ETFs — Nasdaq, NYSE and CBOE https://t.co/fidlQLWBzN pic.twitter.com/gCm3B1MKGO

— James Seyffart (@JSeyff) August 8, 2024

The same day, the CBOE submitted a revised filing to the SEC. This new 44-page filing was much more detailed than the original 15-page filing, addressing issues such as position limits and market manipulation concerns. suggests It is thought that these exchanges may have received some feedback from the SEC.

Despite this progress, there is no guarantee that the SEC has fully engaged with the exchanges on these issues. Analyst Seyffart hinted that this could be another delaying tactic, potentially pushing the decision deadline back to the end of April 2025.

Adding to the mix is ​​another development on the horizon. Representatives from Nasdaq and BlackRock have requested that the SEC allow trading options on the iShares Ethereum Trust ETF, the only Ethereum-based ETF listed on the Nasdaq exchange.

If this proposal is approved, the list of ETFs suitable for options trading could be expanded and the scope of cryptocurrency-related financial instruments available on the market could be further expanded.

However, as with the Bitcoin ETF options, the final decision on this application is not expected before April 2025.

Demand for options on Bitcoin ETFs is increasing

As Bitcoin continues to mature as an asset class, demand for adding options to spot BTC ETFs is increasing. Why?

Essentially, options are contracts that give investors the right, but not the obligation, to buy (call option) or sell (put option) an asset at a predetermined price before a specified date.

In traditional finance, options are widely used to hedge risks, speculate on future price movements, and generate income through various strategies.

Let’s look at a few of the benefits:

Risk management

One of the primary reasons institutions want to see options tied to Bitcoin ETFs is the ability to manage risk more effectively.

For example, during severe Bitcoin price declines (like the dramatic 50% drop in May 2021 or the recent ‘Crypto Black Monday’ crash), investors could use put options to protect their positions from heavy losses.

For institutional investors who manage billions of dollars in assets and need to protect their portfolios from sudden market changes, the ability to hedge against volatility is vital.

Improved liquidity

Another critical advantage of offering options on BTC ETFs is the potential increase in market liquidity. Historically, introducing options trading on major assets has led to increased liquidity and trading volumes.

For example, the Chicago Mercantile Exchange (CME) observed this trend when it introduced Bitcoin options in January 2020.

If the same happens with BTC ETFs, it would be easier for large investors to enter and exit positions, reducing the risk of sharp price movements. More liquidity generally attracts more participants, creating a more stable and balanced market.

Price discovery

Options markets are generally viewed as a more efficient mechanism for price discovery, providing valuable information about investors’ views and expectations of future price movements.

For example, the rise in Bitcoin options trading on platforms like Deribit or Delta is giving investors a clearer picture of where Bitcoin is headed in the market.

If similar options become available for BTC ETFs, they could play a significant role in helping investors understand and predict market trends.

The road ahead

If approved, these options could attract a wave of institutional investment, offer new tools to manage risk and profit from market volatility, potentially increasing demand for Bitcoin, pushing up prices and spurring the creation of new financial products.

But the SEC has been notoriously slow to approve crypto-related innovations. Its repeated delays and requests for more information have left the timeline unclear. It remains to be seen whether these options will eventually get the green light.

Disclosure: This article does not provide investment advice. The content and materials contained on this page are for educational purposes only.