Cryptocurrencies are experiencing historic volatility, but options traders are seeing positive signs in the market after turmoil and controversy overtook digital asset lenders. and others in the field.
Cryptocurrencies are experiencing historic volatility, but options traders are seeing positive signs in the market after turmoil and controversy overtook digital asset lenders. and others in the field.
Chris Bae, managing director and co-founder at structured derivatives solutions provider EDG and a former trader at UBS and Goldman Sachs, is looking at open interest and is following exchanges worldwide. offers options trading.
“That doesn’t mean liquidity has dropped significantly,” Bae said in an interview. “There is a lot of data showing that market maturity has progressed, and in the options market in particular, business is, to a large extent, normal, given the environmental context in which we live. live in.” Bae added that the bid-ask spread seems reasonable.
Of course, the environment has been strained by a number of hacks, as well as an explosion of stablecoin projects and investments by big-name crypto hedge funds. Over the past few weeks, lenders, in particular, have shown instability, with C Network and Babel Finance freezing withdrawals, and Three Arrows Capital, a major institution. electronic money hedge funds, facing liquidity problems. And it all comes against a backdrop of less accommodative monetary policy, where the Federal Reserve and other global central banks are furiously raising interest rates to counter price hikes.
Sure, the market is much different from last year’s bull run. Open interest, or the total number of outstanding contracts, has dropped from its high. Open interest is down more than $7 billion from a record $15 billion in October 2021, according to data from Skew. Volume is currently slightly below $600 million, compared to an all-time high of more than $8 billion also in October.
Patrick Chu, head of APAC insurance at Paradigm, a liquidity provider for crypto derivatives, said that the drop in open interest reflects market sentiment. During a bear market, interest rates tend to decline.
Options can serve two functions, he said. One is hedging, and the second is speculation. “First, the number of deployed assets shrinks, so there will be less fences. Second, speculatively, people have a long-term bias only towards cryptocurrencies, so when the market goes down people will get rekt, “a reference to the word “destroyed” usually use in the crypto community.
However, Chu said, his company has seen “more and more TradFi players” — or traditional financial players — showing an interest in options. And they’re entering the market, he said. That could help explain why open interest has remained stable, despite all the turmoil in the crypto industry.
Those institutions are also playing a larger role in other data. A report from Amber Group, a digital asset company, shows that their desks have seen an increase in demand for put options following liquidations witnessed over the course of several weeks. via. “Risk mitigation is particularly worthy of consideration in the current market environment,” the note said.
Meanwhile, Luke Farrell, a trader at crypto market maker GSR, said he has noticed a big shift in the options space over the past two years compared to previous cycles. Institutions were born, according to him, while cryptocurrencies, prior to 2017, were heavily influenced by retail engagement. Today, institutions are using options to tailor risk management solutions or to protect a portfolio or position. Additionally, he said, investors can play with options on an expanding number of coins, a trend that drives holders to want to use them for risk management solutions.
Ultimately, Farrell said, Bitcoin miners, many of whom have sunk in hot water amid the digital currency’s price drop, are insuring their future production, a shift from last year when, amid a bull market, they didn’t buy protection options. “They are willing to pay a little to protect the downside of reducing their production costs,” he said. “It’s an interesting change.”
