Expect Bitcoin ETF Options to Launch Before 2025

There’s growing anticipation that Bitcoin ETF options will begin trading in the United States before 2025. After some delay in regulatory momentum, applications to list options on spot Bitcoin exchange-traded funds (ETFs) are receiving renewed scrutiny from regulatory bodies. Experts predict that options on Bitcoin ETFs could start on U.S. exchanges as soon as this year, with options for Ethereum ETFs expected to follow shortly thereafter.

The Role of Options in Cryptocurrency Trading

Options are contracts granting the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, with “call” and “put” options serving the purposes of bullish and bearish traders, respectively. They are particularly appealing for hedging against price volatility (imagine if you had locked in the right to sell Bitcoin at $73,000) and are commonly favored by speculators.

Although the introduction of options trading may seem like a secondary concern following the much-anticipated launch of Bitcoin ETFs in January, their significance cannot be overstated. Options are vital for institutional adoption, particularly given the historical volatility associated with crypto ETFs. The market for options trading in cryptocurrency looks poised to expand exponentially, should the current trends hold.

Regulatory Bodies and the Path to Approval

Regulatory bodies are starting to show a more favorable stance towards Bitcoin ETF options. In January, the primary U.S. exchanges that list spot BTC ETFs—including New York Stock Exchange (NYSE) Arca, Cboe, and Nasdaq—requested permission from the Securities and Exchange Commission (SEC) to also list options on these funds. Though the SEC responded with a prolonged silence, concerns from industry watchdogs slowed the applications’ progress. For example, in May, the private organization Better Markets Inc. cautioned the SEC to critically evaluate the applications, highlighting potential risks to retail investors stemming from marketing such options. The group’s concern referenced the “meme stock” events surrounding GameStop in 2021, which reflected the volatility and unpredictability associated with aggressive trading.

The SEC’s careful approach saw the agency repeatedly ask for more time to deliberate on these applications throughout the early months of 2023. However, on August 8, Cboe submitted an amended application to the SEC, significantly more detailed than its original. The lengthening application now addresses major concerns such as market manipulation and position limits, suggesting a warming of regulatory attitudes towards Bitcoin ETF options.

Market analysts, such as Bloomberg Intelligence’s James Seyffart, have indicated that there is tangible movement concerning Bitcoin ETF options, suggesting that the SEC has provided some feedback that could expedite the process. Bloomberg forecasts that options on spot Bitcoin ETFs might debut in the fourth quarter of 2023, with regulatory pressures from the election year potentially nudging timelines forward, potentially within the next few months.

While anticipation builds for spot Bitcoin options, U.S. investors can already trade options on futures-based Bitcoin ETFs, which utilize derivatives to simulate Bitcoin’s price movement. However, these futures ETFs often lag behind their spot market counterparts due to the costs associated with rolling over monthly futures contracts. Research from K33 indicates that the leading Bitcoin futures ETF, ProShares’ Bitcoin Strategy ETF (BITO), underperformed the spot price of Bitcoin by approximately 2.6% from January to May.

A Promising Future for Spot Bitcoin ETF Options

Despite the inefficiencies, the market for options on these futures ETFs has been robust. As of August 9, open interest in Bitcoin futures ETFs—determined by the total notional value of active call and put contracts—has surpassed $3.25 billion according to the Options Clearing Corporation. For context, the cumulative net asset value of all Bitcoin futures ETFs is around $4.3 billion, demonstrating that the market for options is almost equivalent to the market for the underlying futures ETFs.

Spot Bitcoin ETFs, on the other hand, boast a significantly larger asset base, exceeding $58 billion as of August 9. If the existing enthusiasm for options on BTC futures ETFs is any indicator, a substantial new market, potentially nearing $45 billion, is set to emerge once spot Bitcoin ETF options become available.