The recent launch of Bitcoin exchange-traded funds (ETFs) has marked a significant milestone in the evolution of cryptocurrency investments. These financial products have provided a more accessible way for investors to gain exposure to Bitcoin without directly holding the digital asset.
The anticipation is building for the next big step: introducing options on spot Bitcoin ETFs. Options, financial contracts that allow traders to buy or sell an underlying asset at a predetermined price, are crucial tools for both hedging and speculation.
The expected launch of BTC ETF options in 2025 is poised to be a game-changer for institutional investors and could drive even greater adoption of cryptocurrencies in the financial markets.
Regulatory Landscape
The journey toward the approval of BTC ETF options has been anything but smooth. The U.S. Securities and Exchange Commission (SEC) plays a pivotal role in this process, as it approves new financial products for trading on U.S. exchanges.
Initially, the SEC was reluctant to approve options on spot BTC ETFs, citing concerns about market manipulation and the potential risks to retail investors. External pressures, including warnings from private industry watchdogs like Better Markets Inc., urged the SEC to proceed cautiously, especially in the wake of the “meme stock” frenzy surrounding GameStop in 2021.
However, recent developments have indicated a shift in the SEC’s stance. In January, the New York Stock Exchange (NYSE) Arca, Cboe, and Nasdaq—the three U.S. exchanges that spot BTC ETFs—submitted applications to list options on these funds. Although the SEC initially responded with delays and requests for additional information, momentum began to build in August.
Cboe’s amended application, filed on August 8, addressed the SEC’s concerns in greater detail, particularly around market manipulation and position limits. This progress has fueled optimism that BTC ETF options could be approved and launched by the fourth quarter of 2025.
Potential Impact of BTC ETF Options
Introducing BTC ETF options could significantly impact the cryptocurrency and financial markets. U.S. investors can trade options on Bitcoin ETFs that synthetically track BTC’s price using futures.
However, these futures-based ETFs often underperform their spot market counterparts due to the costs of rolling over monthly futures contracts. For example, ProShares’ Bitcoin Strategy ETF (BITO), the most popular futures-based Bitcoin ETF, underperformed the spot market by approximately 2.6% between January and May 2023.
The market potential for BTC ETF options is enormous. As of August 9, 2023, all BTC futures ETFs’ combined net asset value was around $4.3 billion, with open interest on options for these ETFs exceeding $3.25 billion.
In contrast, spot BTC ETFs command a much larger asset base, exceeding $58 billion. If the options market for BTC futures ETFs is any indication, a new BTC options market worth nearly $45 billion could emerge once these products are launched.
For institutional investors, options are critical for managing risk and maximizing returns. Financial advisors, who operate a significant portion of the $9 trillion ETF market, rely on options to hedge against sharp market movements.
Hedge funds, too, can use options in sophisticated strategies like the “covered strangle” to optimize their portfolios. With major financial institutions like Morgan Stanley already allowing their advisors to pitch spot BTC ETFs to clients, the availability of options will only increase the attractiveness of these products to institutional capital.
