The U.S. Securities and Exchange Commission (SEC) has recently approved BlackRock to list and trade options for its spot Bitcoin exchange-traded fund, the iShares Bitcoin Trust ETF (ticker: IBIT). This development introduces new dynamics into the cryptocurrency market, leading analysts to ponder potential shifts in demand for physical Bitcoin.
CryptoQuant analysts have raised an important question: Will the availability of options on the IBIT ETF result in decreased demand for physical Bitcoin? As institutional traders may opt for "paper" derivatives rather than directly investing in spot Bitcoin ETFs, the demand for actual Bitcoin could decline.
According to analysts, the introduction of options on the IBIT ETF might lead to an increase in the "paper" supply of Bitcoin. Institutions can gain exposure to Bitcoin without purchasing it directly. This trend mirrors the futures market, where the "paper Bitcoin" supply surged from 279,000 to 549,000 BTC during the 2022 bear market as investors sought ways to short Bitcoin without entering the spot market.
Derivatives trader Gordon Grant discussed the implications of this trend, drawing parallels with the gold market. He emphasized that while paper trading constitutes a significant portion of total trading volumes, there remains a necessity for physical demand that supports this supply. He noted, "Paper gold trading makes up a significant chunk of the total average daily volumes, and while open interest can burgeon in the paper space, the physical underpinning remains vital."
As Bitcoin integrates into traditional finance, its role as collateral becomes more complex. Grant pointed out that Bitcoin isn't readily accepted as collateral for derivatives contracts, leading participants to rely more on U.S. dollars rather than Bitcoin for these transactions. This preference for dollar-denominated transactions is likely due to the liquidity and acceptance of dollars in traditional markets.
Despite these challenges, Grant highlighted the overall expansion of the Bitcoin product market. The share of Bitcoin derivatives is increasing, indicating a growing interest among investors. He stated that we might observe a "growing pie and growing pie share" phenomenon, where the total size of Bitcoin products, including spot and derivatives, continues to expand.
Grant also mentioned that the price of options could be affected by the new IBIT options product, influencing implied volatility. He expressed concerns about a potential volatility squeeze, referencing past retail demand spikes for options. "The real question is how Bitcoin options markets will digest new activity and interest," he added.
