As the cryptocurrency market endured a significant sell-off and is seeing the prices of major cryptoassets remain muted relative to a year ago, Bitcoin ($BTC) options traders are seeing a silver lining in the sell-off as bullish signs emerge.
According to a Bloomberg report, numerous experts have been pointing to numerous bullish signs being seen in the options market. The experts include Chris Bae, chief executive and co-founder at structured-derivative-solutions provider EDG and a former UBS trader, who said open interest does not suggest liquidity has been thinning “dramatically.”
There’s a lot of data that suggests the maturity of the market has progressed and that in the options market in particular, it’s business as normal, to a large degree, when taking into context the environment that we’re in.
The cryptocurrency sell-off was exacerbated by embattled cryptocurrency firms who both have been laying off staff and freezing withdrawals from their platforms citing “extreme market conditions.” Crypto lender Celsius Network has reportedly been advised to file for bankruptcy, while rival lender babel Finance and crypto exchange CoinFLEX froze withdrawals.
Three Arrows Capital, a major crypto hedge fund, is said to be facing liquidity troubles. On the backdrop, a less-accommodative monetary policy from the U.S. Federal Reserve and other central banks has also been pressuring cryptos and other risk assets.
Bitcoin options’ open interest is reportedly at little over $7 billion, down from a record $15 billion in October of this year. Volume is below $600 million, compared to an all-time high of over $8 billion in October. The head of institutional coverage APAC at Paradigm, a liquidity provider for crypto derivatives, Patrick Chum noted that the drop in open interest is a reflection of market sentiment.
Chu noted that options can be used as a hedge, and there is now less to hedge as the amount of assets deployed has shrunk. Similarly, the exec added speculators have a long-only bias in crypto, meaning that when the market endures a significant downturn liquidations occur. Chu added that his firm has been seeing traditional finance participants show interest in options and enter the market.
Per the analyst, traditional finance players entering the Bitcoin options market helps explain why open interest levels haven’t been as volatile as the rest of the market. Amber Group, a digital asset firm, has published a report showing that institutions have been increasing their demand for put options in the wake of liquidations seen in the cryptocurrency market over the last few years. The report added:
Risk mitigation is especially worthy of consideration under current market environments.
Luke Farrell, a trader at crypto market maker GSR, told Bloomberg that institutions are entering the options market to hedge positions or portfolios. Moreover, Farrell noted that investors can now buy options on numerous crytpoassets, which has spurred holders to use them for risk management.
Bitcoin miners, which have been seeing their revenues plunge along with crypto prices, can also hedge their future products with the use of BTC options.