Cryptocurrency enthusiasts are optimistic that the approval of Bitcoin ETF options could enable institutional investors to execute various trading strategies, potentially driving up Bitcoin's price significantly.
Investors are closely monitoring the Options Clearing Corp. and the Commodity Futures Trading Commission to see if and when they will approve the iShares Bitcoin Trust ETF options. The U.S. Securities and Exchange Commission had already approved the Nasdaq company's application to list such products.
Although numerous cryptocurrency options products already exist, they are either poorly regulated or entirely unregulated. This lack of regulation makes some institutions hesitant to participate due to compliance requirements.
According to Eliézer Ndinga, Head of Digital Assets Strategy and Business Development at 21Shares, the approval of Bitcoin ETF options would allow more institutional investors to use these tools for executing various strategies. For instance, investors could implement covered call strategies, where the asset holder sells a call option on the asset to generate income.
A call option gives the contract holder the right to buy the underlying asset at a specified price before the option's expiration date, but it does not obligate the holder to make the purchase.
Additionally, the launch of Bitcoin ETF options might lead to phenomena like a "gamma squeeze," which occurs when an asset is heavily bought in a short period. When institutions sell these call options, they need to buy the underlying asset to hedge their positions. As the asset's price increases, they have to buy more to maintain the hedge, further driving up its price.
The surge in GameStop (GME) shares in 2021 was a result of a gamma squeeze. Jeff Park, Head of Institutional Strategy at Bitwise Asset Management, stated that the impact of a gamma squeeze on Bitcoin could be more profound than on traditional assets. He explained that stocks and bonds have valuation frameworks, but Bitcoin does not adhere to these rules. Park emphasized that while stocks can’t be infinitely squeezed due to potential new share issuance or short selling, Bitcoin does not have such mechanisms, making its potential upside nearly limitless.
However, Park also noted that it is uncertain how popular covered call strategies using Bitcoin ETF options would become. Currently, very few significant cryptocurrency players profit by selling covered call options in the crypto options market.
Darius Tabai, CEO of decentralized exchange Vertex, believes that a large-scale gamma squeeze in Bitcoin is unlikely. He explained that such phenomena occur in "meme stocks" like GameStop because they lack futures contracts, making them difficult to short. However, Bitcoin has a well-developed futures market, allowing for easy shorting, which breaks the logic of a gamma squeeze.
