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Bitcoin price volatility is likely to increase in both directions following the recent approval of Bitcoin ETF options, according to Jeff Park, head of Alpha Strategies at Bitwise Investments. In an interview with Anthony Pompliano, Park explained how these newly discovered options differ from other existing crypto derivatives and why they can have a significant impact on the dynamics of the Bitcoin market.
Why Bitcoin ETF Options Are a Game Changer
Park outlined a broader thesis in the speech, noting, “Flexibility is not just a static measure of past performance; it shows the distribution of possible consequences and the severity of those consequences.” He emphasized that the introduction of Bitcoin ETF options will bring new aspects to how traders interact with Bitcoin, which will likely increase both the rise and fall of the price. This flexibility, he said, is due to the unique characteristics of options as financial instruments.
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While Bitcoin options are not entirely new—offshore platforms such as Deribit and LedgerX already offer similar tools—ETF options present a regulated market overseen by US authorities such as the CFTC and SEC. This makes a big difference, according to Park, because “the removal of someone else’s risk is something that crypto has not yet fully solved overseas.” He noted that the clearing mechanisms provided by the Options Clearing Corporation (OCC) bring more security to these trades, which institutional investors have been seeking for a long time.
More importantly, Park highlighted the benefit of cross-collateralization, which is not available in existing crypto-only platforms. “Cross-collateralization allows traders to use unrelated assets, such as a gold ETF, as collateral in Bitcoin trading,” he explained. This flexibility increases revenue and efficiency in the market. “You can’t do this on Deribit or on any other crypto-focused platform,” Park emphasized, calling it a “great opening” of the Bitcoin derivatives market.
Park expects that the introduction of these options will increase the volatility of Bitcoin prices. “In any efficient and liquid market, you need organic buyers and sellers to create natural demand and supply,” he explained. However, the real impact comes from how traders hedge their positions, especially when they are “short gammas,” a situation where their hedging activities can reinforce price movements.
In short, Park said, “Sellers using short gamma must buy more Bitcoin as prices rise and sell more as prices fall, thereby adding to volatility.” This volatility is important in understanding how ETF options can push Bitcoin’s value in both directions. He also pointed out that, historically, most Bitcoin options activity has been driven by speculation, rather than risk management strategies such as put calls, which tend to reduce volatility.
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One of Park’s key points was the potential for growth in Bitcoin’s derivatives market. In traditional markets such as equities, the derivatives market is 10 times larger than the underlying market. In contrast, Bitcoin’s open interest in derivatives currently represents only 3% of the spot market value, according to Park’s calculations. “The introduction of ETF options could lead to a 300x increase in the market size of Bitcoin derivatives,” predicted Park.
This growth will bring significant new liquidity but may also drive volatility, due to the large volume of speculative trades and the planning power introduced by options. “That’s the number of stars that there will be new flows and income in this market that may add to the volatility,” said Park.
“In the global economy, derivatives markets are much larger than the existing markets,” he added, pointing to the fact that in traditional asset classes such as equities and commodities, derivatives play an important role in risk management and speculation. “Bitcoin is moving towards a similar structure, and that’s where we’ll see the most significant price movement and liquidity,” Park concluded.
At press time, BTC traded at $62,334.
Featured image from YouTube, chart from TradingView.com