In the past six weeks the price of Bitcoin has been stable above $9,000, even surging above the $10,000 level three times since May 7. Bitcoin has kept its momentum well when compared with previous price cycles in 2019 and early 2020.
The difference between the Bitcoin market in the third quarter of 2020 and in previous quarters is that the options market has seen explosive growth. The Bitcoin market is primarily divided into four submarkets: spot, options, futures, and institutional.
Spot refers to Bitcoin trading with no borrowed capital or leverage. Options are contracts that allow investors to buy Bitcoin or other cryptocurrencies at a given time at a previously agreed-upon price, typically used by professional traders. Futures contracts allow investors to trade Bitcoin with additional capital and Bitcoin exchanges support up to 125x leverage. Lastly, the institutional market facilitates trades for institutional investors such as hedge, family, and pension funds.
Up until early 2019, the Bitcoin market was mostly dominated by spot and futures exchanges. Coinbase, Binance, and BitMEX maintained a large share of the daily Bitcoin volume.
Over time, institutional investment vehicles such as the Grayscale Bitcoin Trust and options exchanges like Deribit began to see a rapid increase in volume and open interest.
As of June 15, data from Skew shows that the options market’s total open interest is hovering above $1.5 billion. The term open interest is used to describe the total value of all open options contracts in the market.
Deribit specifically accounts for $1.1 billion of options market open interest, taking around 70% of market share. In February, Deribit sold 10% of its equity in a deal reportedly valuing the company with a nine-figure valuation.
CME, the world’s biggest financial derivatives exchange, also saw its Bitcoin option product set record high volume in May. According to Skew, CME is on track to surpass its all-time high monthly volume again in June.
The consistent increase in the volume, open interest, and trading activity in the Bitcoin options market indicates that the sector is seeing a noticeable inflow of professional traders.
If 2018 and 2019 were dominated by retail investors trading in the spot and futures market, there is a possibility that professional traders and institutions will account for a large portion of Bitcoin’s volume in 2020.
Goldman Sachs acknowledged in a recent client call that institutional investors may find volatility in the cryptocurrency market appealing. The bank’s Wealth Management Division said:
“We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale.”
Various data from the options and institutional markets, as well as major financial institutions like Goldman Sachs suggest that trading activity among professional and institutional traders is rising. Such a shift in trend could also impact volatility in the Bitcoin market over the long term.