Demand for bitcoin (BTC) options on regulated U.S. derivatives exchanges has dried up even as price volatility reaches record highs.
The Chicago Mercantile Exchange (CME) traded just three bitcoin options contracts on Tuesday, with a notional amount of 15 bitcoin (approximately $80,000), the exchange told CoinDesk. That is CME's lowest daily volume for bitcoin options on record, according to crypto derivatives firm Skew Markets. The previous record low of $125,000 was registered Jan. 24.
CME’s product went live on Jan. 13 and traded a total of $2.2 million in notional value on the first day, beating its rival, the Intercontinental Exchange’s Bakkt platform, which had traded roughly $1 million since its open on Dec. 9.
Volumes on CME rose to a record high of $5.4 million on Jan. 17, but have been declining ever since. As of Tuesday, trading volumes were down 96 percent from the minor spike of $2.1 million seen March 9.
Meanwhile, Bakkt has seen no options trading activity since Feb. 27.
Bakkt rolled out its product on Dec. 9 and saw a record volume of $528,000 in notional value on Jan. 8. However, its options volume evaporated following the launch of CME's options in mid-January.
Notably, Bakkt has traded option contracts on just four days since mid-January.
The slowdown in activity on both CME and Bakkt is perhaps surprising, given that bitcoin’s price volatility has soared over the last few days.
The cryptocurrency’s three-month implied volatility – the option market’s opinion of bitcoin’s potential moves – rose from 3.5 percent (66.9 percent annualized) to a record high of 6.8 percent (130 percent annualized) on a daily basis in the seven days to March 17, according to Skew data.
Heightened volatility typically fuels demand for hedging instruments like options, which are derivative contracts that give holders the right to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy, while a put option gives the right to sell.
However, the opposite has happened in bitcoin on regulated U.S. exchanges: volumes have actually dropped precipitously as volatility has skyrocketed.
The decline in options volume seems to have been caused by institutional traders treating bitcoin as a source of liquidity during the past week’s massive stock market sell-off, which triggered a multitude of margin calls.
“Last week’s market rout saw institutional investors selling many risk assets, including bitcoin. CME is a regulated platform designed for traditional investment managers seeking bitcoin exposure without a priority of ownership or utilization, and therefore saw a drop in volume as their customers led the flight to cash," Tom Lombardi, director at digital asset management firm Wave Financial told CoinDesk.
Supplementing that argument is the fact that open interest, or open positions on CME’s option market, fell to a five-week low of $6.5 million of notional value on March 12 and stood at $8.4 million on March 17. That’s down significantly from the record high of $22 million witnessed Feb. 28.
Bitcoin futures listed on CME have also seen a slowdown in activity. Open interest declined to a two-month low of $171 million last week, having hit a high of $338 million on Feb, 12. Meanwhile, trading volume dropped to a three-month low of $88 million on March 6, after a record high of $1.1 billion on Feb. 18. It was $212 million on Tuesday.
The recent slide in volumes and open interest suggest traders likely closed out hedges (calls/puts) while liquidating positions in the spot and the futures market.
Options trading volume on Deribit, the world's biggest crypto options exchange, slipped to $52 million on Tuesday to register its lowest level since March 1.
Volume hit a record high of $248 million March. 12 as bitcoin crashed by a staggering 39 percent from $7,950 to $4,850, tracking risk aversion in the traditional markets. The downside move was likely exaggerated due to forced liquidations on the BitMEX exchange.
Disclosure: The author holds no cryptocurrency at the time of writing.
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