What Options Tell Us About Bitcoin

Bitcoin has had a good year. It has reclaimed much of the territory lost during crypto winter. It can be hard to decide what comes next with Bitcoin as it is typically quite volatile. However, options trading in Bitcoin gives us a hint. Options traders are hedging bets on the senior crypto token. The ratio of puts to calls on Bitcoin have gone up significantly. This tells us that options traders are concerned about Bitcoin’s price falling. This could be because they fear that the SEC will nix all pending spot Bitcoin ETFs or that said ETFs will not cause a rise in Bitcoin’s price.

What Has Been Going On With Bitcoin?

The market has been excited about the prospect of spot Bitcoin ETFs. The belief is that tons of new customers will start buying Bitcoin. These are folks who have no interest in cryptocurrencies, NFTs, decentralized finance, or the blockchain in general. But they are interested in making money. Much of the recent Bitcoin rally seems to be due to excitement about the Securities and Exchange Commission giving the OK to a host of spot Bitcoin ETFs. What Bitcoin options traders are hedging against are two possibilities. One is that the SEC will not approve any of the pending spot Bitcoin ETFS. The other is that they will approve them but the expected flood of new Bitcoin buyers will not materialize. We alluded to this possibility in our article about the Euronext Bitcoin ETF that is already up and running on European markets and has not had a big effect on the market.

Bitcoin Needs a VIX Indicator

A valuable indicator for the stock market is the VIX. This is a volatility index based on options trading on the CBOE or Chicago Board Options Exchange. The VIX index is based on the ratio of calls to puts on in the coming weeks. A call option gives the buyer the right to purchase a stock at a set price when it goes much higher. A put option gives the buyer the right to sell a stock at a set price when it falls much lower. In each case the buyer profits if the market moves in the expected direction. What is happening in the Bitcoin options market is that the ratio of puts to calls has gone up significantly. This tells us that Bitcoin options traders are hedging the risk of the Bitcoin market falling in the time frame of when the SEC is obliged to say yes or no to the first two applications for spot Bitcoin ETFs. Because there is no VIX index for Bitcoin one needs to pay attention to the market itself rather than simply watching the VIX itself as one does with the stock market.

Follow the Money in the Bitcoin World

A reliable bit of advice in any financial situation is to follow the money. As Bitcoin rises we are again hearing the mantra that it is a hedge against inflation which it wasn’t. We are hearing that it is a store of value as traditional currencies like the dollar fall, which it was not during crypto winter. And we are hearing how mom and pop retail investors will flock to spot Bitcoin ETFs, pour money into the Bitcoin world and drive the price to new highs. However, the money in the Bitcoin options market is buying puts to protect against a drop in the price of Bitcoin. It would appear that the same folks who engage in Bitcoin wash trading to create the impression of a pending rally are actually making plans to profit when the price of Bitcoin falls!

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