Expect Bitcoin ETF options to launch before 2025

After gathering dust for months, applications to list options on spot Bitcoin (BTC) exchange-traded funds (ETFs) are finally getting attention from regulators. Expect BTC ETF options to start trading on United States exchanges this year. Options on Ethereum (ETH) ETFs will soon follow.

Options are contracts that grant the right to buy or sell — “call” or “put” in trader parlance — an underlying asset at a certain price. They are attractive hedging instruments (don’t you wish you locked in the right to sell BTC at $73,000?) and are popular with speculators, too.

Adding options trading may seem anticlimactic in the wake of BTC ETFs’ long-awaited launch in January. That couldn’t be further from the truth. Options are critical for institutional adoption — especially with highly volatile crypto ETFs. Plus, if existing crypto options are any indication, spot BTC ETF options will be a huge market.

Regulators are warming up to Bitcoin ETF options

In January, the three US equities exchanges that list spot BTC ETFs — the New York Stock Exchange (NYSE) Arca, Cboe, and Nasdaq — asked the Securities and Exchange Commission (SEC) if they could also list options on those funds.

The SEC greeted the applications with a deafening silence, and outside input wasn’t encouraging. In May, private industry watchdog Better Markets Inc. urged the SEC to “proceed especially cautiously because… the inevitable marketing of such options to retail investors could cause tremendous harm,” as evidenced by “the meme stock frenzy surrounding GameStop in 2021.” 

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The SEC apparently took this to heart and asked for more time to make a decision in March, and, again, in April, and, again, in July. The ice is finally thawing. On Aug. 8, Cboe filed an amended application to the SEC. It’s almost three times longer than the first and addresses issues such as market manipulation and position limits in greater detail.

“There's definitely some movement on Bitcoin ETF options,” Bloomberg Intelligence analyst James Seyffart said in a post on X. "The SEC likely gave some sort of feedback."

Bloomberg predicts spot BTC options go live in the fourth quarter. Given election-year pressures on the SEC, sometime before November is likely. Spot ETH ETFs will follow suit. According to an Aug. 6 filing, Nasdaq asked the SEC for permission to list options on BlackRock’s iShares Ethereum Trust (ETHA).

Creating a new market

Meanwhile, US investors have free reign to trade options on a strictly inferior class of Bitcoin ETFs — those that synthetically track BTC’s price performance using futures.

Futures ETFs generally underperform spot market equivalents because the cost of rolling over monthly futures contracts drags down overall returns. According to crypto researcher K33 Research, the most popular Bitcoin futures ETF — ProShares’ Bitcoin Strategy ETF (BITO) — underperformed spot by around 2.6% between January and May.

Absent any better alternatives, the market for these options is white hot. In total, open interest on BTC futures ETFs — measured by the notional value of all active call and put contracts — exceeds $3.25 billion as of market close on Aug. 9, according to data from The Options Clearing Corporation, an industry self-regulatory organization (SRO).

For comparison, the combined net asset value of all BTC futures ETFs is approximately $4.3 billion, according to data from Yahoo Finance. In other words, the market for options on BTC ETFs is almost as large as the market for BTC ETFs themselves.

Spot BTC ETFs command a vastly larger asset base — more than $58 billion as of market close on Aug. 9. If the options on BTC futures ETFs are any guide, a nearly $45 billion new BTC market is waiting to be born.

That’s more than just a big number. Options are crucial market infrastructure and mark an important waystation on the road to mass crypto adoption.

Financial advisors — who control as much as half of investment flows in the $9 trillion ETF market — rely on options to safeguard against sharp market movements (like the 28% drop in Ether’s spot price on Aug. 5). More than 10% of advisers actively used options to manage client portfolios as of 2023, according to a survey byThe Journal of Financial Planning.

Options also play a critical role in hedge fund strategies, such as the “covered strangle” touted by 10x Research, an investment research firm.

Already, Morgan Stanley — the largest financial advisory with some $3.75 trillion under management — has given its 15,000 advisors the greenlight to pitch spot BTC ETFs to clients. Options will only make spot BTC ETFs more attractive to institutional capital.

If you listen closely, you can already hear the investment flows pouring in.