Like futures, the launch of bitcoin options on major exchanges has been met with anticipation. Hopeful observers believe the CME’s and Bakkt’s entry into the burgeoning options market will further encourage institutional participation. It will – but not necessarily in the way they expect.
For major institutions, miners and other corporates involved in the space, options open a new, powerful tool for managing risk and volatility. But, as we can see from other financial markets, these capabilities won’t come from the listed options themselves. Instead, the real action will take place in over-the-counter hedges. While these corporate-focused products will rely on vanilla option liquidity, they will not take place on exchanges.
Before we explain why this is the case, it’s worth highlighting the growing demand for options as a means to hedging. Options have been the fastest-growing product segment of the crypto market in 2019, with the trajectory of volumes likely to accelerate in 2020. Crypto derivatives volumes are nascent compared to the spot market and the size by which some financial derivatives dwarf their respective spot markets. Nonetheless, the emergence of a variety of derivatives should have a significant influence on the growth of the space.