Observation | Behind the recent rise of Bitcoin is the explosive growth of the options market

Source/LongHash

Over the past six weeks, the price of Bitcoin has remained stable above $9,000, and has even broken through the $10,000 mark three times since May 7. Compared with the price cycles in 2019 and early 2020, Bitcoin is currently maintaining good momentum.

The difference between the performance of the Bitcoin market in the third quarter of 2020 and previous quarters is that the options market has experienced explosive growth. The Bitcoin market is mainly divided into four sub-markets: spot, options, futures and institutional markets.

Spot refers to Bitcoin trading without capital borrowing or leverage. Options are contracts that allow investors to buy Bitcoin or other cryptocurrencies at a predetermined price at a specific time. They are mainly used by professional traders. Futures contracts allow investors to trade Bitcoin with additional capital. Currently, Bitcoin exchanges support up to 125 times leverage. Finally, the institutional market is designed to facilitate transactions for institutional investors such as hedge funds, family offices or pensions.

Until early 2019, the Bitcoin market was dominated by spot and futures exchanges. Coinbase, Binance, and BitMEX accounted for a large share of Bitcoin’s daily trading volume.

Over time, institutional investors like Grayscale Bitcoin Trust and options exchanges like Deribit have seen rapid growth in trading volume and open interest.

According to Skew data, as of June 15, the total value of open interest in the options market has always hovered above $1.5 billion. The term open interest is used to describe the total value of all open options contracts in the market.

Specifically, Deribit has $1.1 billion in open interest in the options market, accounting for about 70% of the market share. In February, Deribit sold a 10% stake in a transaction that reportedly gave the company a nine-figure valuation.

The trading volume of Bitcoin options products of CME, the world's largest financial derivatives exchange, also hit a record high in May. According to Skew, according to the current development, CME will continue to break its historical highest monthly trading volume in June.

The combined growth in volume, open interest, and trading activity in the Bitcoin options market suggests that a large number of professional traders are entering the market.

If retail investors in the spot and futures markets dominated the market in 2018 and 2019, professional traders and institutions may account for a large portion of Bitcoin trading volume in 2020.

Goldman Sachs acknowledged in a recent client call that institutional investors may be attracted to the volatility in the crypto market. The bank’s wealth management division said:

“We also believe that while hedge funds may be attracted to cryptocurrencies due to their high volatility, this attraction does not constitute a viable investment rationale.”

Whether it is various data from options and institutional markets, or the views of major financial institutions such as Goldman Sachs, they all show that trading activities by professional traders and institutional investors are increasing. This trend shift may also have an impact on the volatility of the Bitcoin market in the long run.

LongHash, understand blockchain with data.

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