The total open interest rate for Bitcoin Options (BTC) has risen to $ 2 billion, 13% below its all-time high. While open interest is still focused on Deribit, the Chicago Mercantile Exchange (CME) also hit $ 300 million.
In simple terms, derivatives options contracts allow investors to buy protection against both gains (put options) and losses (put options). While there are more sophisticated strategies, the presence of liquid options markets is a positive sign.
For example, derivative contracts allow miners to lock in income associated with the price of a cryptocurrency. Arbitrage and market creation firms also use tools to protect their trades. Finally, highly liquid markets attract larger participants and improve efficiency.
Implicit volatility is a useful underlying account that can be obtained using options. When traders face increased risks due to large price swings, the indicator will move upward. The opposite occurs during periods when prices are constant or moderate price fluctuations are expected.
Volatility is often referred to as the fear index, but it is basically a lookback account. The 2019 peak that we saw in the chart above coincided with a $ 13,880 peak on June 26, followed by a sudden $ 1,400 drop. The most recent increase in volatility occurred in March 2020, after falling 50% in just 8 hours.
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Indicators point to sharp price fluctuations in the beginning
Periods of low volatility are catalysts for larger price swings as they indicate that market makers and arbitrage firms are willing to sell protection against lower premiums.
This is because an increase in open interest in a derivative results in a more complete liquidation in the event of a sudden change in price.
Investors must then turn their attention to the futures markets to assess if a potential storm is brewing. An increase in open interest means either an increase in the number of market participants or the creation of larger positions.
The current $ 4.2 billion in open positions may be modest compared to the August peak of $ 5.7 billion, but still sufficient.
There are two reasons that may be holding back more, including the running costs of the BitMEX CFTC and the $ 150 million KuCoin hack.
High volatility is another important factor holding back the open interest rate on bitcoin derivatives.
Even though 57% was the lowest in 16 months, this is still a huge bonus, especially for long term options. Both options and futures have a lot of synergies, and more advanced strategies combine both markets.
A buyer who bets on a strike of $ 14,000 before expiration on March 21 after 160 days must pay a 10% bonus. Therefore, the expiration price should be $ 15,165, or 34% higher than the current price of $ 11,300.
In comparison, Apple stock (AAPL) has 41% volatility in 3 months. Although it is 29% higher than the S&P 500, the long-term impact on Bitcoin is a staggering 47%. With the same 34% increase in the AAPL call option in March 2021, the premium will be 2.7%.
For comparison, if APPL is priced at $ 11,300, then the March 2021 version will cost $ 308. Meanwhile, BTC is trading at $ 1,150, nearly four times its value.
Are you betting on $ 20,000? Options may not be the best solution
While holding onto a position in the eternal future for extended periods of time was an implicit cost, it was not stressful. This is because the funding rate for standing futures contracts is usually charged every 8 hours.
Eternal Future Funding Rate. Source: data on digital assets.
Funding rates have fluctuated from positive to negative over the past two months. This results in a net neutral effect for buyers (longs) and short sellers who may have held open positions.
Due to their inherent high volatility, alternatives to bitcoin may not be the ideal way to structure directed rates. The same $ 1,150 value can be used for March 2021 to get 4x leveraged bitcoin futures contracts.