Bitcoin traders like their options

Even as bitcoin soars, investors are keeping their options open, judging by a record rally against derivatives. Open interest in bitcoin options and futures has surged in the past month as fears have dogged global banking, reaching a record high of 433,540 contracts on March 23 on Deribit, a leading exchange for crypto-focused derivatives products.

In the 12 months before March, however, open interest ranged between 150,000 and 300,000, referring to the number of contracts not yet settled between buyers and sellers, which provides a measure of investor participation in a market. Most options traders are betting on bitcoin prices to jump higher, with open interest in call options at 206,979 contracts on Deribit, more than double bearish put options at 93,857.

In theoretical terms, open interest in bitcoin’s latest peak of $12.24 billion on March 22 was the highest since mid-November when bitcoin traded near $60,000, according to Deribit data. “We have never seen so much activity before,” said Luuk Strijers, commercial manager at Deribit. “We’ve reached the same levels of open interest as 2021 at half the prices, which means we’ve doubled.”

Option contracts give buyers the right, but not the obligation, to buy or sell an underlying asset at a fixed price in the future. Such contracts are used not only as a lower-risk, lower-reward alternative to actually buying bitcoin, but also as a way to hedge other bets, making it a better measure of investor participation than an indicator of price expectations. RELATIVE VALUE TRADE

Nevertheless, investors may have good reason to be bullish about the spot price of bitcoin, which has risen 69% in 2023 to around $28,020, making it one of the year’s best-performing assets. Furthermore, bitcoin futures on the CME exchange trade in “contango,” meaning that future contract prices are trading higher than in the past, indicating that investors expect prices to continue to rise. Futures for April are trading at $28,475 while the May contract is trading at $28,645, data from the exchange showed.

“This has set up the market for some interesting relative value trades where bitcoin can now be used as a financing or hedging instrument,” said analysts at crypto investment firm Matrixport. Leo Mizuhara, CEO of digital assets management platform Hashnote, said the macro environment for bitcoin and other digital assets became more favorable given the Federal Reserve’s large liquidity injections to support the banking sector.

While the recent Fed actions may trickle down to crypto, overall liquidity in crypto spot markets remains low, which could lead to sharp price swings, market participants warned. Bitcoin volatility is hovering around 66, below a peak of 96 hits during the March banking crisis, but still higher than where it started in 2023 at 58, according to data from CryptoCompare.

THROUGH THE ETHER? After an estimated $4 billion of bitcoin options expired at the end of the first quarter on March 31, open interest had fallen to $8.7 billion by Monday — still at levels not seen in the two years before March.

Investors also remain bullish on ether, judging by options trading. Open interest in ether on Deribit has 1.7 million call options against 656,158 puts. The spot price of ether has jumped 50% to $1,795 this year, as the Ethereum blockchain prepares for another major upgrade to the blockchain later in April, known as the Shanghai Upgrade.

However, in the past two weeks, both ether and its big brother bitcoin have been treading uneasy waters, leaving investors betting on boom or bust. “Bitcoin has ranged between $26,500 and $29,000 and ether between $1,700 and $1,850,” said Aakash Desai, an options trader at crypto-liquidity provider B2C2.

“Breakthroughs in either direction can be interesting.”

(This story has not been edited by Devdiscourse staff and is automatically generated from a syndicated feed.)