US Securities and Exchange Commission approves options for Bitcoin ETFs

"Securities and Exchange Commission". Bild von Scott S via flickr.com. Lizenz: Creative Commons

The Securities and Exchange Commission (SEC) allows the issuance of options based on Bitcoin ETFs. Not everyone is thrilled about it – but some see it as a „monumental achievement“ for the crypto market.

The US Securities and Exchange Commission (SEC) approved options based on Bitcoin ETFs. Specifically, it concerns an application for a derivative for BlackRock’s iShares Bitcoin Trust. Such options are a simple method for traders to quickly and with leverage bet on the price of Bitcoin, and for investors to include even more complex Bitcoin-based financial products in their portfolios.

Shortly after the ETFs went live, exchanges registered trading options. The SEC has now released this within the framework of its usual monitoring and regulation. The usual rules and regulations for other ETF options are to apply.

However, this does not mean that trading options is imminent. The SEC’s approval is only the first step in the authorization process. The OCC (Office of the Comptroller of the Currency) and the CFTC (Commodity Futures Trading Commission) must also give their approval.

Options are already common in the crypto market today

Options essentially refer to the right to buy or sell a certain underlying asset, such as Bitcoin, by a certain date. There is a distinction between „European“ and „American“ options. The former allow for buying or selling only on the expiration date, whereas „American“ options can be exercised at any time up to the expiration date.

Options actually originated from commodity trading. They allowed producers to more reliably calculate their income and traders to hedge against unexpected price spikes or crashes. Today, the majority of options are used for speculation with „synthetic“ values: investors no longer directly buy into the asset but simulate a financial transaction with it, such as a purchase or sale entirely settled in euros or dollars. Since the underlying asset is used at most to cover the transaction, this is also referred to as „short selling“ or „short buying.“

A popular type of option is „perpetual swaps,“ or „eternal“ options on an exchange. Many crypto exchanges already offer this today as „margin trading.“ A purchase or sale is simulated and then settled at a convenient time by making the opposite sale or purchase. This allows traders to bet easily on rising or falling prices – known as going „long“ or „short“ – without actually purchasing Bitcoins. The necessary dollars are borrowed, while the coins and tokens in the account serve as collateral; a „leverage“ can multiply the result by a certain factor, usually up to 10-fold.

Margin trading with „perpetual swaps“ allows traders to significantly profit from small price fluctuations without converting coins and tokens in their portfolio into liquid dollars. Even if one only has Bitcoins in the account, with borrowed dollars, they can simulate the purchase of additional Bitcoins, entering a bet that the portfolio would otherwise not allow.

Opinions are divided on what it means to make such options possible for Bitcoin ETFs.

Risks for retail investors and the markets

Let’s start with the skepticism. In its approval, the SEC also includes excerpts of a critical comment from a high-ranking observer. He argues that the market for Bitcoin ETFs is still too young. Already, decreasing interest is evident after the initial hype has subsided. Before allowing options, one should wait to see where the bottom lies.

Such options could also „expose retail investors to enormous risks.“ After all, they enable significant losses with unconsidered bets. Anyone who forgets to set the appropriate „stop-loss“ can quickly clear out half their portfolio with a leveraged option; even without this type of credit, options are perfect instruments to turn supposed knowledge of what will happen in the future into substantial real losses.

Moreover, options on Bitcoin ETFs could jeopardize the broader financial system. The approval of spot ETFs alone has deepened the connection between volatile cryptocurrencies and traditional finance. Options would further intertwine crypto and traditional finances and increase the associated risks. While a spot ETF merely adds Bitcoin to a portfolio, options allow Bitcoin to serve as the basis for numerous other financial products.

Volatility as value

Jeff Park from BitWise Invest, which itself issues a Bitcoin ETF, sees it more positively . He recognizes options on ETFs as a game changer – for relatively similar reasons to those cited skeptically by the aforementioned observer. „Without exaggeration,“ Park says, „this marks the most monumental possible achievement for the crypto market.“ However, the explanation as to why is not entirely straightforward.

The first part of the explanation is still easy to understand: Options on Bitcoin ETFs allow for the expansion of synthetic trading on Bitcoin. Such „short sales“ or „short buys“ are already possible on many crypto exchanges today. But options on ETFs bring these instruments to regular financial markets. They would also make Bitcoin ETFs more attractive as they gain a utility that actual Bitcoins do not have.

The second, likely more important part of Park’s theory is more complicated: Bitcoin enjoys a very special kind of volatility. Firstly, it is a „laughing“ rather than a „crying“ volatility because it spikes upwards at least as often as it crashes downward. Secondly, the volatility does not diminish with increasing spot volume; it may even increase. This configuration allows for adding a particular „volatility of volatility“ through options, which can enrich a portfolio as protection against other risks and complement usual volatility indices like the VIX or VVIX. The volatility of Bitcoin, generally seen as a drawback, can be repackaged into an interesting financial product through options.

Bitcoin, and this is perhaps the most important point, cannot leverage this unique multiplier domestically, unlike stock issuers who can profit from volatility by issuing new shares and setting an upper limit on the price. Commodities like oil and gas are the closest analogs to Bitcoin in this respect, but options on them typically have an expiration date and are therefore more commonly based on futures than on spot markets. With Bitcoin, the financial world could experience a „regulated leverage on a permanent commodity with a hard cap on supply“ for the first time.

Such a setup could quickly become „wild.“ While exchanges close trading in other commodities when prices fluctuate too wildly, this is not possible with Bitcoin due to the ever-present parallel, decentralized market. Hence, Park concludes: „It’s going to be incredibly fantastic.“

However, as one commentator notes, there might be a catch to the fun. Synthetic derivatives, as allowed by options on ETFs, lift the hard cap on quantity. Without derivatives, only Bitcoin holders can sell. With derivatives, dollar holders can sell too. The market will undoubtedly open up to more speculation with them. For better or for worse.