Bitcoin’s Options Market Has Overtaken Futures Market

This year has seen a resurgence in the cryptocurrency market, with Bitcoin (BTC) notably doubling its value. This surge is attributed to factors like demand for safe-haven assets, anticipation surrounding a U.S. spot ETF, and expectations of a more dovish stance from the Federal Reserve.

Initially, most of the trading activity was focused on Bitcoin’s spot and futures markets. However, the options market, which provides a cost-effective means to speculate on Bitcoin’s price movement, has gained prominence. According to CoinGlass data, the open interest (OI) in BTC options has now eclipsed that of the futures market, with $17.39 billion in active options contracts surpassing the futures market’s $15.84 billion.

Luuk Strijers, Chief Commercial Officer at Deribit, a leading crypto options exchange, interprets this trend as a sign of market maturation. He explained to CoinDesk that the shift towards options demonstrates a growing preference for more sophisticated trading strategies, including strategic positioning, hedging, and capitalizing on implied volatility.

The expansion of the options market also means that traders must now consider the effects of factors like quarterly and monthly settlements and the hedging activities of market makers on Bitcoin’s spot prices.

Options are derivatives that grant buyers the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before a specified date. Call options provide the right to buy, and put options the right to sell. Traditionally used for risk mitigation, options can also be used by speculators to magnify returns, with bulls typically purchasing puts for downside protection and bears using calls to guard against price surges. Effective options trading relies on understanding key metrics, known as the Greeks – delta, gamma, theta, and rho – which influence the price of an options contract.

The rising popularity of options can be attributed to their flexibility, allowing traders to hedge and profit not only from Bitcoin price movements but also from factors like market volatility and time. Earlier in the year, strategies like writing or selling options during market lulls to earn additional yield were popular. More recently, traders have been purchasing options to benefit from the spike in market volatility, positively impacting option prices.

In contrast to options, spot and futures markets are more one-dimensional, focusing solely on price direction. Futures contracts, which involve higher leverage and greater risk than options, commit buyers and sellers to a future transaction of an asset. This leverage can lead to substantial losses exceeding initial deposits and potential forced liquidations by exchanges.