Could spot BTC ETF options turn the crypto market on its head?

Why is the SEC’s decision on Bitcoin ETF options so crucial? Could this be the move that finally legitimizes Bitcoin in the eyes of traditional finance?

After months of anticipation, the momentum behind options on spot Bitcoin (BTC) exchange-traded funds is finally building up. What once seemed like a distant possibility is now gaining traction with regulators, thanks to the growing interest in spot Bitcoin ETFs. 

According to Bloomberg analyst James Seyffart, options could debut as early as Q4 2024, with the U.S. Securities and Exchange Commission expected to make a crucial decision by September 21.

Seyffart isn’t the only one with high hopes. Another analyst, Eric Balchunas, shares the optimism, seeing the SEC’s engagement as a positive indicator for the market.

Nate Geraci, President of the ETF Store, also points out that options trading already exists for some crypto derivatives exchange-traded products (ETPs), which could pave the way for these new Bitcoin ETF options. 

So, what does all this mean for the market? Let’s explore this deeper and understand the potential implications of Bitcoin ETF options coming to life.

Ongoing efforts to introduce options on Bitcoin ETFs

The story of Bitcoin in 2024 has been nothing short of exhilarating, not just in terms of its market presence but also as a key political topic leading up to the U.S. presidential election in November.

Amid this, spot BTC ETFs, which went live in January 2024, have seen explosive growth, amassing over $58 billion in assets under management (AUM) as of August 12, setting the stage for something even more ambitious: the introduction of options on these ETFs.

Back in January 2024, three major U.S. equities exchanges—New York Stock Exchange (NYSE), Chicago Board Options Exchange (CBOE), and Nasdaq—submitted requests to the SEC to list options on these spot BTC ETFs.

These requests were met with a resounding silence from the SEC. Months passed with little to no feedback, leaving the exchanges and the market in a state of uncertainty.

The SEC’s initial response came in March when it asked for more time to make a decision, followed by similar delays in April and July.

Things took a surprising turn on August 8, when all three exchanges — CBOE, Nasdaq, and NYSE — suddenly withdrew their initial applications. The reason behind this coordinated move remains unclear, but it’s speculated that they may have received some feedback from the SEC that led to this decision.

Notably, on the same day, CBOE submitted an amended application to the SEC. This new 44-page filing was much more detailed than the original 15-page submission, addressing issues like position limits and concerns about market manipulation, which suggests that these exchanges may have received some feedback from the SEC.

Despite this progress, there’s no guarantee that the SEC is fully engaging with the exchanges on these matters. Analyst Seyffart even hinted that this could be another delaying tactic, potentially pushing the decision deadline back to late April 2025.

Adding to the mix, there’s another development on the horizon. Representatives from Nasdaq and BlackRock have requested the SEC to allow trading options on the iShares Ethereum Trust ETF, which is the only Ethereum-based ETF listed on the Nasdaq exchange.

This proposal, if approved could expand the list of ETFs eligible for options trading, further broadening the scope of crypto-related financial instruments available in the market.

However, similar to the Bitcoin ETF options, the final decision on this application isn’t expected until April 2025.

The growing demand for options on Bitcoin ETFs

As Bitcoin continues to mature as an asset class, there’s a growing demand to add options to spot BTC ETFs. But why?

At their core, options are contracts that give investors the right — but not the obligation — to buy (call option) or sell (put option) an asset at a predetermined price before a specific date. 

In traditional finance, options are widely used for hedging risks, speculating on future price movements, and generating income through various strategies. 

Let’s explore a few advantages:

Risk management

One of the primary reasons institutions are keen on seeing options linked to Bitcoin ETFs is the ability to manage risk more effectively. 

For instance, during Bitcoin’s severe price drops—such as the dramatic 50% plunge in May 2021 or the recent ‘Crypto Black Monday’ crash—investors could have used put options to protect their positions from heavy losses. 

The ability to hedge against volatility is essential for institutional investors who manage billions of dollars and need to safeguard their portfolios against sudden market shifts.

Enhanced liquidity

Another critical advantage of introducing options to BTC ETFs is the potential boost in market liquidity. Historically, the launch of options trading on major assets has led to increased liquidity and trading volumes. 

For example, the Chicago Mercantile Exchange (CME) observed this trend when it introduced Bitcoin options in January 2020. 

If the same happens with BTC ETFs, it could make it easier for large investors to enter and exit positions, reducing the risk of sharp price movements. More liquidity often attracts more participants, creating a more stable and balanced market.

Price discovery

Options markets are often seen as a more efficient mechanism for price discovery, providing valuable insights into investor sentiment and expectations about future price movements. 

For instance, the surge in Bitcoin options trading on platforms like Deribit or Delta offers the market a clearer picture of where investors believe Bitcoin is headed. 

If similar options become available for BTC ETFs, they could play a crucial role in helping investors understand and anticipate market trends.

The road ahead

If approved, these options could attract a wave of institutional investment, offering new tools for managing risk and profiting from market fluctuations, potentially leading to increased demand for Bitcoin, driving up prices, and encouraging the creation of new financial products.

However, the SEC has been notoriously slow in approving crypto-related innovations. Its repeated delays and requests for more information have left the timeline uncertain. Whether these options will finally get the green light remains to be seen.