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According to Jeff Park, head of Alpha Strategies at Bitwise Investments, Bitcoin price volatility is likely to raise in both directions following the recent approval of spot Bitcoin ETF options. In interview with Anthony Pompliano, Park explained how these newly available options differ from existing cryptocurrency derivatives and why they could significantly impact Bitcoin market dynamics.
Why Bitcoin ETF Options are a game changer
Park made a sweeping thesis in the interview, noting: “Volatility is not just a static measure of past performance; reflects the distribution of potential outcomes and the severity of those outcomes.” He emphasized that the introduction of the Bitcoin ETF option will add a recent dimension to traders’ interactions with Bitcoin, potentially amplifying both price increases and declines. He argued that this volatility is due to the unique characteristics of options as financial instruments.
While Bitcoin options are not entirely recent – offshore platforms such as Deribit and LedgerX already offer similar instruments – ETF options introduce a regulated market overseen by US authorities such as the CFTC and SEC. According to Park, this makes a profound difference because “removing counterparty risk is something that cryptocurrency has not fully addressed offshore.” He noted that the clearing mechanisms provided by the Options Clearing Corporation (OCC) provide additional security for these trades, which has long been requested by institutional investors.
More importantly, Park highlighted the advantage of cross-collateralization, which is not available on existing cryptocurrency-only platforms. “Cross-collateralization allows investors to use uncorrelated assets, such as gold ETFs, as collateral in Bitcoin transactions,” he explained. This flexibility increases liquidity and efficiency in the market. “This cannot be done on Deribit or any platform that is solely focused on crypto,” Park stressed, calling it a “massive unlocking” of the Bitcoin derivatives market.
Park predicts that the introduction of these options will raise Bitcoin price fluctuations. “Any well-functioning and liquid market needs organic buyers and sellers to create natural supply and demand,” he explained. However, the real impact comes from how dealers hedge their positions, especially when they are “short gamma,” a situation where their hedging activities can intensify price movements.
In practice, Park said, “Dealers who short gamma must buy more Bitcoin when prices rise and sell more when prices fall, thereby increasing volatility.” This energetic is crucial to understanding how ETF options can drive Bitcoin’s price to extremes in either direction. He also emphasized that historically, most Bitcoin options activity has been driven by speculation rather than risk management strategies such as covered call options, which tend to reduce volatility.
One of Park’s key points was the dramatic growth potential of the Bitcoin derivatives market. In customary markets such as equities, the derivatives market is often 10 times larger than the underlying cash market. By contrast, Bitcoin’s open interest in derivatives currently accounts for just 3% of its spot market value, according to Park’s data. “The introduction of ETF options could lead to a 300-fold increase in the size of the Bitcoin derivatives market,” Park predicted.
This raise would provide significant recent liquidity, but would also likely create greater volatility due to the greater volume of speculative trading and the structural leverage introduced by options. “This is an astronomical number where new flows and liquidity will flow into the market, which will likely increase volatility,” Park said.
“In the global economy, derivatives markets are much larger than cash markets,” he added, pointing out that in customary asset classes such as equities and commodities, derivatives play a key role in risk management and speculation. “Bitcoin is moving towards a similar structure and that is where we will see the most significant price and liquidity movements,” Park concluded.
At the time of publication, BTC was trading at $62,334.
Featured image from YouTube, chart from TradingView.com