Bitcoin Options Specialist Bitnomial Rolling out Block Trades

Bitcoin-focused derivatives exchange Bitnomial is rolling out block trading for the first time in an industry bid to capitalize on a long time traditional finance practice, as US institutional interest in bitcoin and ether options has booked a marked uptick.

Open interest in the US and in other countries plummeted in the fourth quarter of 2022 as digital asset markets collapsed. But in the first quarter of this year, open interest, a metric that reflects the number of outstanding contracts on a given unsettled options contract, has recovered. 

Bitcoin (BTC) was down about 7% in the last seven days through the stock market close in New York on Thursday. 

In terms of bitcoin options on Deribit, “recovered” is an understatement — they hit an all-time high last month, as previously reported by Blockworks. Volume on Deribit, long one of the world’s largest bitcoin and cryptocurrency option exchanges, exceeded $20 billion at the time, the company said.

Options on digital assets in the US are limited to bitcoin and ether (ETH) by regulators. 

In an exclusive interview with Blockworks on Thursday, Bitnomial President Michael Dunn said the exchange is rolling out block trading this week because “now’s a good time as we see a lot of crypto-native firms coming in” to the bitcoin options trading space with dry powder to splurge. 

And they’ve been asking, according to Dunn, for customized baskets of bitcoin option books specifically. Crypto hedge fund managers, family offices and other types of traders typically shop around for market makers on digital asset options, often tapping a number of counterparties to try to lock in the best possible price, coupled with the best possible execution. 

Block trading is an over the counter (OTC) arrangement that results in an agreement between a market maker and a buy side counterparty to take on a specified number of derivatives at a specified cost of carry. 

It’s more time consuming than executing an algorithmic trade on BTC options tied to underlying bitcoins. But traders find the practice worthwhile if they’re buying in enough bulk that they snap up futures contracts at a discount to where the market is pricing the cost of opening and closing them. 

“Crypto native [traders], they came knocking on our door saying, ‘Hey, you guys have a lit order book and electronic execution, that’s great. But we’re looking to do more complex, structured trades that actually make sense to do atomically and in bigger size and kind of poke around and do block deals.”

Below are some additional excerpts from Blockworks’ interview with Dunn, who formerly worked in the Chicago options trading scene and has experience with quantitative market making of options on traditional option classes as a result.

Blockworks: Given your and the exchange’s background on the algorithmic side of things, what’s your take on trends you’ve been noticing from a technical perspective? What’s been interesting to you generally, institutional or retail moves from a trading perspective? 

Dunn: There is something kind of fascinating that we noticed. 

Back in December of last year is when we noticed that backwardation occurred in the bitcoin futures curve in our markets and other comparable markets like CME — which is fascinating to us, because that just creates a lot of opportunity for people who have bitcoin on their balance sheet to go in and capture those spreads and actually make money moving Bitcoin into the futures ecosystem, which is really awesome. 

That’s a real advantage our exchange has because CME is a cash-settled product. So, moving your bitcoin to capture those spreads, it’s very difficult. There’s a lot of slippage. You’re doing a lot of weird trades to get in and out of that product …  

Now, from the end of the quarter last year to now, we’re seeing more of a steepening of the curve, which is what I would expect given the interest rate environment that we’re in right now. 

Blockworks: Who do you view as your direct competition now?

Dunn: That’s a great question. If I’m going to be honest, nobody. 

We’re the only ones that are focusing on the physical deliverable space in the US, the only ones that are continuing to build that out. And I think that’s obvious from our customers who we talked to. There’s just not a lot of options out there.

Blockworks: How would you answer that same question last fall? 

Dunn: I’ll be honest, the way that we view [or viewed] other exchanges, particularly FTX, is that we didn’t really view them as competition. 

Because ultimately, it’s a different customer base. You had a lot of US firms that were setting up these offshore businesses to go and trade those. But that necessarily wasn’t our target market. 

Look, when you look at a lot of the US firms now, they’re not willing to set up those offshore companies. They’re not. It’s too much risk for them — particularly after the FTX collapse. 

That’s actually been great marketing for us because you know, like, even look at Deribit. There’s a lot of platform risks there that are being underappreciated from a risk perspective. One thing we saw with Deribit: it had [at one point] like $20 billion of open interest. 

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Bitnomial’s trading team booked its first block trade in recent weeks, which was executed between crypto trading firm DV Chain and Electric Capital, a long time digital assets-focused investment manager with a venture capital arm and other investment strategies under its trading purview. 

A spokesperson for the company told Blockworks that the exchange’s largest transaction was booked on April 5, adding that Bitnomial’s interest “hit record levels since the beginning of” the first quarter. 

Dunn said that the exchange’s view is that competition is coming, and that it’s “when, not if” that Wall Street banks start making markets on crypto options in real numbers.

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