Interest in Ethereum options exceeds Bitcoin, could push Ethereum to new highs

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Since mid-March, investors have shown an increased interest in ETH options due to price performance. Open interest has reached an all-time high of about $157 million, with a total of about 660,000 contracts, of which 279,000 (42%) will expire on June 26, 2020. Other investors believe that this is related to the upcoming launch of ETH 2.0, and that pledged Ethereum will reduce the overall supply on the market and push up ETH prices. Perhaps Ethereum options are a new driving force for the growth of the crypto market.

By Anirudh Tiwari

Translated by: Zion Editor: Rose

Ethereum (ETH) options have had an exceptional year, with open interest on Deribit (the largest market for these options) surging 315% over the past two months to $158 million, breaking the $150 million mark for the first time.

Although Ethereum was initially established as a wallet service for users of the Ethereum platform to work with applications developed on the platform, Ethereum has recently become a clear competitor to Bitcoin (BTC), the second largest cryptocurrency by market capitalization.

The emergence of ETH options

ETH options first emerged in March 2019, when Deribit launched Ethereum derivatives on its exchange, including options, futures, and perpetual contracts. About a year later, following the Bitcoin halving and the general cryptocurrency price rally in 2020, Ethereum options have become a major development in the altcoin space.

To seize this new opportunity in the market, Chicago-based cryptocurrency exchange ErisX launched the first U.S. Ethereum futures contract in the second quarter, which will even be regulated by the U.S. Commodity Futures Trading Commission. Even Malta-based exchange OKEx launched Ethereum options to get in on the action, and has attracted the trading market since its launch in June.

According to observations by crypto derivatives analysis firm Skew in February, when ETH was pegged to BTC, investors were already anticipating growth in the market. Looking at the ETH/BTC spread over a six-month period, the at-the-money implied volatility rose to a six-month high of 22%. Implied volatility is the standard deviation of traders' predicted returns, and it indicates the market's expectations of future risk in an asset. This peak suggests that investors expect the percentage change in ETH price (in either direction) to be higher than BTC over the next six months.

Growth is not isolated

The phenomenon of Ethereum options picking up in Q2 is not unique to altcoins, it has gone hand in hand with BTC options and crypto derivatives in general, with the cryptocurrency derivatives market hitting an all-time high of $602 billion in trading volume in May. Interestingly, after May, investor interest in BTC futures (the largest BTC derivative) began to decrease.

On June 12, BTC futures fell to a 2020 low, while open interest in Ethereum options continued to rise to a new all-time high. Deribit Chief Commercial Officer Luuk Strijers discussed the growing interest in Ethereum options with Cointelegraph, saying:

Since mid-March, we have seen increased interest in ETH options due to price performance, new companies entering the options space, and partners stepping up sales efforts. Open interest is at an all-time high of approximately $157 million with a total of approximately 660,000 contracts, of which 279,000 (42%) are set to expire on June 26, 2020.

Although the impact of the launch of ETH2.0 is subtle, the market outlook seems to be positive about this change as it will affect miners and investors in different ways, which is also beneficial to the market and investors after the BTC halving. Strijers further added:

We also see an increase in over-the-counter (OTC) interest leading traders to hedge on Deribit, which may be related to the shift in investor interest towards ETH after the BTC halving and the upcoming launch of ETH 2.0. Investors seem to appreciate the potential gains that 2.0 may bring, which may be one of the reasons for the rise in ETH prices since March. Investors believe that the staked Ethereum will reduce the overall supply on the market and push up ETH prices.

Use of Smart Contracts and Decentralized Finance

As the team behind Ethereum puts it, “Ethereum is a decentralized platform that runs smart contracts”. Smart contracts run on the Ethereum Virtual Machine and are tools that help investors trade assets in a transparent, conflict-free manner without the services of middlemen. As such, smart contracts enable Ethereum to become a distributed computing network with a wide range of blockchain use cases. These, combined with the decentralized financial ecosystem, can also improve investor confidence and encourage institutional participation.

The rise of altcoins such as ETH, Komodo (KMD), and Cordano (ADA) is evidence that crypto investors are seeking alternative avenues for speculation besides BTC. Cointelegraph spoke to Nobert Goffa, executive manager of blockchain storage system ILCoin, who commented:

It was only a matter of time before Ether options were launched. This is a good sign for the entire market. More new users and classic instruments mean good financial performance for crypto exchanges, thus creating a favorable news backdrop. Ultimately, this helps integrate cryptocurrencies into the current economic system.

Investor asset transfer and lending

Crypto lending is key to driving Ethereum’s decentralized finance ecosystem to over $1 billion in locked value. Essentially, this means borrowers are able to use their crypto assets as collateral to obtain a fiat or stablecoin loan, while lenders provide the assets required for the loan at an agreed-upon interest rate.

According to Darius Sit, managing partner at crypto asset trading firm QCP Capital, the firm has seen a large number of investors moving from lending to options, and it is clear in the market that the credit risk from lending to highly unregulated, frantically refinancing platforms far outweighs the interest gains. Regarding the viability of options in this unregulated lending situation, Sit further commented:

With options, one is able to generate higher returns than with borrowing. One is also able to better control the level of risk. With borrowing, one could lose the entire amount borrowed due to default, and be just a few steps away from a multi-layer rehypothecation loan that collapses. With options (given proper risk management), you will get a much greater return and have the ability to reduce downside risk.

Concerns about platform defaults and high interest rates have also prompted a general shift in people's views on options. Sit further added that if the price of cryptocurrencies does not recover as quickly as the drop on Black Thursday in March, some lending platforms will go bankrupt and be unable to meet their obligations. He added: "Fear of this real systemic risk is a key factor that has driven people's interest from crypto credit to crypto options."

Institutional interest in ETH options

As Cointelegraph previously analyzed, there is currently a slight short-term bullish sentiment prevalent throughout the market. To further understand this participation, Cointelegraph spoke to Alex Batlin, CEO of Trustology, a custody platform for crypto assets. He said: "Institutional investors buy options because they believe the value of the asset will rise, so they want more exposure to maximize returns," adding that "belief is fundamental, and in this case, the opportunity to generate new income comes from ETH2.0 staking and the growing DeFi market." On the launch of a new platform where these options can be traded, he further stated:

New products from platforms like OkEx and ErisX suggest that there is ample reason to believe that new yield opportunities through staking and DeFi protocols, as well as lower barriers to entry due to the maturing of institutional-grade infrastructure, will drive institutional interest in ETH options.

Open interest is positively correlated with price

When looking at the correlation of open interest and price over time, we notice that the price increase since mid-March is closely related to the increase in open interest. Cointelegraph also reported on the possibility of Ethereum reaching $300 in the near future. This further adds to the bullish sentiment in the market and will also make it more profitable for investors, as Sit said: "The increase in interest and liquidity in the volatile market is an encouraging step for ETH's development as a trading asset. Larger institutional participation could be a positive for ETH."

The chart below shows that ETH/USD price is positively correlated when compared to the timeframe of open interest statistics above.

Gauging from the indicative analysis of Ethereum options and the positive market sentiment, it is clear that growth is not expected to slow down until the launch of Ethereum 2.0, which could bring a paradigm shift to the market itself. However, continued technological innovation along with sensible regulations and institutional involvement will be integral to maintaining this growth momentum.

Related reading:

Ethereum wallet MyEtherWallet will let users easily host decentralized websites

Someone bought Grayscale Ethereum Trust for over $2,000

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