The open interest in the Bitcoin Options market has exploded since November 2020. This of course coexists with the increase of the Bitcoin price. But there are more factors that might have contributed to the increase in popularity.
If you look at the ‘’Total BTC Options Open Interest History’’ chart on ByBt, there is a very interesting development in play. Before November 2020 the Total BTC Open Interest was quite steady, fluctuating between 1 Billion and 2 Billion dollars. After November 2020 the Total BTC Open Interest hasn’t gone below 3.5 Billion dollars.
This could mean if the number of participants in the options market is getting larger, that the new participants soaked up the expiring contracts with newly open interest.
The other explanation for the higher low in open interest is that maybe some Mega-Bull-Whale is betting big on the future price of BTC. Thirteen years of Bitcoin tells one thing. Being a Bitcoin bull is always the right option.
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One of the factors that always drive up the whole trading market is the quality and accessibility of exchanges. With mobile apps from FTX, Bitlevex, and Deribit options trading is easier than ever. Since exchanges nowadays are trustworthy and have great security mechanisms, involving cold storage, 2FA, and KYC, this has attracted more sophisticated traders with far deeper pockets. When the quality of exchanges keeps improving, any potential participant standing on the sidelines who still doesn’t trust cryptocurrencies may be finally inclined to join the party. We all know that the whole crypto market, even at 1.91 Trillion Dollars as of 11-8-2021, can still get a lot larger.
The various options available
One of the great benefits of trading options is that you can trade them in any market condition and still make high returns. When trading options you can make money when a market goes up and down. If you simply buy Bitcoin to make a profit, you always have to sell the coin for a higher price than that you paid for. Of course, if you believe in Bitcoin’s future potential and price appreciation, then selling your Bitcoin to buy back for lower prices is a way to make more Bitcoin. But this does come with the risk of getting left behind. Recently everyone was expecting a drop further down to 20K but after another test of 29K support the Bitcoin price broke out of its 3-month range and is currently still trading above 45K. Though this can easily change and a drop below 30k is still possible, selling your precious Bitcoin is, in the long term, riskier than buying a puts option.
This makes options trading a great hedge against short-term volatility. Instead of having to sell (all) your coins, you are probably better off placing bets on whatever the market may be doing in X amount of time. When you generate profits from those bets you can get back into the market in a more passive Dollar Cost Average Strategy. This is probably a little wiser approach than to just market execute a 100X long every day of the year.
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The global pandemic and inflation
The coronavirus has had the whole world in lockdown for more than 1.5 years now. Looking at the initial sell-off in March 2020, that would have been the golden opportunity in almost every market. Bitcoin went up almost 20X, Ethereum went up almost 40X measuring from the lows to the highs. Even the S&P 500 is up 100% YTD. This of course has to do with people spending their time at home not being able to spend their money like normal and they’re looking for investment opportunities. With fears of inflation and the increasingly more educated retail investor, there is no doubt that more and more people are joining the financial markets, injecting more and more capital. Any type of trading, therefore, has seen a massive surge in demand, and options markets are no different.
It is great to see that people are taking measures into their own hands in terms of wealth creation. But one may wonder how much of the decisions made are out of FOMO (Fear Of Missing Out) or research-based.
Considering all the developments the world is going through politically, economically, and technologically it makes total sense that people want to benefit from changes through speculation. In the end trading options is a speculative way to either hedge existing positions or to gain more exposure. Whether markets are in a range, an up or down trend, being able to place a call or put might be a better bet than simply going short or long in a traditional way. Though as a trader the only thing you can do is define your risk and remember ‘’The trend is your friend, until the end’’.