Bitcoin Options Point to Positive Signs After Rout, Traders Say

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(Bloomberg) — Cryp­to is under­go­ing a his­toric bout of volatil­i­ty, but options traders are see­ing pos­i­tive signs with­in the mar­ket in the wake of the ruckus and con­tro­ver­sy that over­took dig­i­tal-asset lenders and oth­ers in the sector.

Chris Bae, chief exec­u­tive and co-founder at struc­tured-deriv­a­tive-solu­tions provider EDG and a for­mer trad­er at UBS and Gold­man Sachs, is look­ing at open inter­est and is track­ing glob­al exchanges that offer options trading. 

“It doesn’t sug­gest that liq­uid­i­ty has thinned dra­mat­i­cal­ly,” Bae said in an inter­view. “There’s a lot of data that sug­gests the matu­ri­ty of the mar­ket has pro­gressed and that in the options mar­ket in par­tic­u­lar, it’s busi­ness as nor­mal, to a large degree, when tak­ing into con­text the envi­ron­ment that we’re in.” Bae added that bid-ask spreads seem reasonable.

The envi­ron­ment, of course, has been strained by a num­ber of hacks, as well as com­bus­tions of sta­ble­coin projects and fold­ings of big-name cryp­to hedge funds. Over the past few weeks, lenders, in par­tic­u­lar, have shown insta­bil­i­ty, with Cel­sius Net­work and Babel Finance freez­ing with­drawals, and Three Arrows Cap­i­tal, a major cryp­to hedge fund, fac­ing liq­uid­i­ty trou­bles. And it’s all com­ing amid a less-accom­moda­tive mon­e­tary-pol­i­cy back­ground, where the Fed­er­al Reserve and oth­er glob­al cen­tral banks are furi­ous­ly rais­ing rates to com­bat price increases. 

To be sure, the mar­ket is much dif­fer­ent than dur­ing last year’s bull run. Open inter­est, or the total num­ber of out­stand­ing con­tracts, has come way down from its highs. OI is down a lit­tle more than $7 bil­lion from a record of about $15 bil­lion in Octo­ber 2021, accord­ing to data from Skew. Vol­ume is cur­rent­ly slight­ly below $600 mil­lion, com­pared with an all-time high of more than $8 bil­lion also in October. 

Patrick Chu, head of insti­tu­tion­al cov­er­age APAC at Par­a­digm, a liq­uid­i­ty provider for cryp­to deriv­a­tives, says that the drop in OI is reflec­tive of mar­ket sen­ti­ment. Dur­ing bear mar­kets, inter­est tends to wane. 

Options can serve two func­tions, he says. One is hedg­ing, and the sec­ond is spec­u­la­tion. “For one, the amount of assets deployed shrinks so there is less to hedge. For two, spec­u­la­tions, peo­ple have a very strong long-only bias in cryp­to, so when the mar­ket goes bear, peo­ple get rekt,” a ref­er­ence to the word “wrecked” that is often used in the cryp­to community.

Still, Chu says, his firm has been see­ing “more and more Trad­Fi play­ers” — or tra­di­tion­al-finance par­tic­i­pants — show­ing inter­est in options. And they are enter­ing the mar­ket, he says. That could help explain why OI lev­els have remained sta­ble, despite all the tur­moil with­in the cryp­to industry. 

That insti­tu­tions are play­ing a big­ger role bears out in oth­er data, too. A report from the Amber Group, a dig­i­tal-asset com­pa­ny, showed that its desk saw an increase in put-option buy­ing demand in the wake of the liq­ui­da­tions seen over the past few weeks. “Risk mit­i­ga­tion is espe­cial­ly wor­thy of con­sid­er­a­tion under cur­rent mar­ket envi­ron­ments,” the note said. 

Mean­while, Luke Far­rell, a trad­er at cryp­to mar­ket-mak­er GSR, says he’s noticed a huge change in the options space over the past two years rel­a­tive to pri­or cycles. Insti­tu­tions, he says, have been com­ing in, where­as cryp­to, pri­or to 2017, was heav­i­ly influ­enced by retail par­tic­i­pa­tions. Today, insti­tu­tions are using options for tai­lor risk-man­age­ment solu­tions or to hedge port­fo­lios or posi­tions. In addi­tion, he says, investors can play with options on an expand­ed num­ber of coins, a trend that spurs hold­ers to want to use them for risk-man­age­ment solutions. 

Final­ly, Far­rell says, Bit­coin min­ers, many of whom have found them­selves in hot water amid price slumps for dig­i­tal tokens, are hedg­ing their future pro­duc­tion, a change from last year when, amid a bull mar­ket, they weren’t buy­ing pro­tec­tive options. “They are will­ing to pay a lit­tle bit to pro­tect on the down­side of turn­ing below their cost pro­duc­tions,” he said. “That’s been an inter­est­ing shift.”

©2022 Bloomberg L.P.



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