Bitcoin options point to positive signs by route, traders say
(Bloomberg) – Crypto is undergoing a historic onslaught of volatility, but options traders are seeing positive signs in the market in the wake of the uproar and controversy that swept past digital asset lenders and others in the sector.
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Chris Bae, CEO and co-founder of the structured derivatives solutions provider EDG and a former trader at UBS and Goldman Sachs, looks at open interest and tracks global stock exchanges that offer options trading.
“It does not indicate that liquidity has thinned dramatically,” Bae said in an interview. “There is a lot of data that indicates that the maturity of the market has developed, and that especially in the options market, business is as normal, largely when you take into context the environment we are in.” Bae added that bid-spreader seems reasonable.
The environment has, of course, been strained by a number of hacks, as well as the burning of stablecoin projects and the folding of large crypto-hedge funds. In recent weeks, lenders in particular have shown instability, with Celsius Network and Babel Finance freezing withdrawals, and Three Arrows Capital, a large crypto hedge fund, facing liquidity problems. And it all comes in the midst of a less accommodating monetary policy background, with the Federal Reserve and other global central banks furiously raising interest rates to combat price increases.
To be sure, the market is much different than during last year’s bull run. Open interest, or the total number of outstanding contracts, has come a long way from the peaks. OI is down a little more than $ 7 billion from the record of around $ 15 billion in October 2021, according to data from Skew. The volume is currently just under $ 600 million, compared to an all-time high of more than $ 8 billion also in October.
Patrick Chu, head of institutional coverage APAC at Paradigm, a liquidity provider for cryptocurrency derivatives, says that the fall in OI reflects market sentiment. During bear markets, interest tends to decline.
Options can have two functions, he says. One is hedging and the other is speculation. “First, the amount of assets distributed is shrinking, so there is less to secure. For two, speculation, people have a very strong long-term bias in crypto, so when the market goes up, people get straight, a reference to the word.” the wreck “which is often used in the crypto community.
Still, says Chu, his firm has seen “more and more TradFi players” – or traditional financiers – showing interest in alternatives. And they are entering the market, he says. This may help explain why OI levels have remained stable, despite all the turmoil in the crypto industry.
That institutions play a greater role is also shown in other data. A report from Amber Group, a company with digital assets, showed that their desktop saw an increase in demand for put options in the wake of the liquidations seen in recent weeks. “Risk reduction is especially worth considering under current market environments,” the memo states.
Meanwhile, Luke Farrell, a trader at crypto market maker GSR, says he has noticed a huge change in the options area over the past two years compared to previous cycles. Institutions, he says, have come in, while crypto, before 2017, was strongly influenced by retail shares. Today, institutions use alternatives to tailor risk management solutions or to secure portfolios or positions. In addition, he says, investors can play with options on an expanded number of coins, a trend that encourages holders to want to use them for risk management solutions.
Finally, says Farrell, Bitcoin miners, many of whom have been in hot water amid falling prices for digital tokens, are securing their future production, a change from last year when, in the midst of a bull market, they did not buy protective alternatives. “They are willing to pay a little to protect on the disadvantage of going under the cost of production,” he said. – It has been an interesting change.
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