Bitcoin ETF options approved: will the market surge again?

The exchanges will implement conservative position limits of 25,000 contracts on the same side of the market for each bitcoin ETF option, as stated in their respective fillings. This limit is lower than that of many other ETF options, reflecting a cautious approach to these new products.

On January 10, U.S. regulators approved the listing of spot Bitcoin ETFs, marking a milestone in the cryptocurrency sector. This event signaled Bitcoin's official integration into the traditional financial system, reaching a broader range of investors and injecting more liquidity into the crypto market.

Following this development, Bitcoin saw a significant surge, surpassing $70,000 in March to hit an all-time high. As of October 22, the total assets under management for Bitcoin ETFs exceeded $64 billion, with nearly one million Bitcoins held.

Could the introduction of Bitcoin ETF options trigger a new market rally?

When investors anticipate a price rally and purchase large volumes of call options, market makers are mandated to maintain a neutral exposure, and become the counterparty to these trades, holding significant short positions in call options, also known as short gamma. As prices rise, these market makers buy the underlying asset to fulfill their obligations to option buyers, further driving up the asset's price. This self-reinforcing cycle is known as "gamma squeeze," playing a key role in the early 2021 GameStop surge.

Bitwise notes that due to Bitcoin's capped supply of 21 million coins, any upward volatility resulting from such a scenario could be even more pronounced.

However, some argue that the introduction of ETF options may have a limited impact. Bitcoin is already a trillion-dollar asset, with substantial institutional participation in Bitcoin ETFs.

According to CryptoQuant, over 1,100 institutional investors held Bitcoin ETFs by October. They own approximately 200,000 Bitcoins, accounting for nearly 20% of the total Bitcoin ETF holdings.

Amberdata suggests that increased institutional involvement might dampen volatility in the long run. Investment managers tend to rebalance their portfolios, selling appreciated assets when Bitcoin prices rise too much. As institutional participation continues to grow, their actions will have a more significant impact on Bitcoin.

Additionally, the restrictions on the open interest of options contracts make it more challenging to execute a short squeeze.

From a technical perspective, Bitcoin's price chart shows an ascending flag pattern on the daily chart. The main rally at the beginning of the year formed the flagpole, and after reaching a record high in March, Bitcoin entered a consolidation phase, forming the flag. A successful breakout above the resistance line could signal further gains after consolidation.

If you're optimistic about Bitcoin's future, you could consider the following options:

High Volatility: Crypto-assets are highly volatile and investing in crypto-assets-linked stocks may involve significant risks. It's crucial to assess your risk tolerance and set clear strategies to avoid significant losses.

Regulatory Developments: The cryptocurrency sector is under close regulatory scrutiny, with policies subject to considerable uncertainty. For instance, initial market rumors suggested that regulators had approved options for 11 Bitcoin ETFs, but only three were confirmed.