Although cryptocurrency is experiencing a historically high level of volatility, Bitcoin options show promising signs following the meltdown.
Although cryptocurrency is experiencing a historically high level of volatility, options traders are observing encouraging indicators in the market as a result of the uproar and controversy that engulfed digital-asset lenders and other players in the industry.
Chris Bae, chief executive and co-founder of structured derivative solutions provider EDG and a former trader at Goldman Sachs and UBS, is monitoring open interest and keeping an eye on international exchanges that facilitate trading in options.
According to Mr. Bae, “it doesn’t signal that liquidity has reduced drastically.” Many data points point to the market’s increased maturity and the fact that, in the context of the current environment, it’s much business as usual in the options market in particular. Bid-ask spreads appear appropriate, continued Bae.
Of course, there have been a number of hacks, as well as the failure of stablecoin initiatives and the folding of well-known crypto hedge funds.
Lenders in particular have demonstrated instability over the previous few weeks, with Celsius Network and Babel Finance banning withdrawals and Three Arrows Capital, a significant crypto hedge fund, experiencing liquidity issues.
And it’s all happening against a backdrop of less accommodative monetary policy, in which the Federal Reserve and other central banks across the world are frantically raising interest rates to counteract price increases.
The market has undoubtedly changed significantly from the bull run of the previous year. The overall number of outstanding contracts, or open interest (OI), has significantly decreased from recent highs.
According to data from Skew, OI is down slightly more than $7 billion from a high of over $15 billion in October 2021. Volume currently stands at little under $600 million, down from an all-time high of over $8 billion in October.
The decrease in OI is indicative of market sentiment, according to Patrick Chu, head of institutional coverage for APAC at Paradigm, a liquidity provider for cryptocurrency derivatives. Interest typically declines during weak markets.
According to him, options might fulfil two purposes. Hedging and speculating are the first. “For starters, there are fewer assets deployed, meaning there are fewer assets to hedge.
Two: Due to strong long-only bias in the cryptocurrency community, when the market turns bearish, people “get rekt,” a pun on the word “wrecked” that is frequently used in the industry.
Chu claims that despite this, “more and more TradFi players” — or participants in traditional finance — have been exhibiting an interest in options. He claims that they are now entering the market. That may contribute to the explanation of why OI levels have held steady despite the turmoil in the cryptocurrency market.
Other data also support the idea that institutions are taking on a larger role.
According to a report from the digital asset firm Amber Group, put-option purchasing demand increased on its desk as a result of the recent liquidations. The note stated that “risk reduction is particularly worthy of consideration under current market settings.”
Luke Farrell, a trader at cryptocurrency market maker GSR, claims to have seen a significant shift in the options market over the past two years compared to previous cycles. Institutions, he claims, have started to invest, whereas retail participation in cryptocurrency before to 2017 had a significant impact.
Institutions now use options to hedge portfolios or positions or to create customised risk management solutions. Additionally, he claims that investors can play with options on a greater variety of coins, a development that encourages owners to use them as risk-management tools.
Last but not least, according to Mr. Farrell, Bitcoin miners, many of whom have gotten into trouble due to price drops for digital tokens, are now hedging their future production, a difference from last year when, during a bull market, they weren’t buying protection 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.”