Approval of BlackRock’s Bitcoin Spot ETF Options by the SEC Could Trigger Unprecedented Volatility
According to Bitwise, the approval of options on BlackRock’s Bitcoin Spot ETF by the SEC could lead to unprecedented volatility in the Bitcoin market. This is mainly due to the potential for a ‘gamma squeeze’ amplified by the market makers’ hedging strategies.
Bitwise predicts strong institutional demand for these call options, which could trigger a skyrocketing Bitcoin price, with each increase in demand fueling a continued upward trend.
However, some analysts believe that the influx of institutions could eventually moderate Bitcoin’s volatility through strategies such as selling covered call options, thus curbing excessive price increases.
Jeff Park from Bitwise warns that the crypto market is preparing for potential unparalleled volatility following the recent approval of BlackRock’s Bitcoin Spot ETF options by the Securities and Exchange Commission. The approval, still pending further validation from the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC), could have significant repercussions on the Bitcoin market, attracting institutional influx while sparking debates on its implications for market volatility.
The Complexity of Volatility and Institutional Strategies
Bitwise Asset Management anticipates a phenomenon called a ‘gamma squeeze,’ similar to what was observed during the GameStop stock frenzy in 2021, in the context of BlackRock’s IBIT options. A gamma squeeze occurs when a surge in call option purchases forces market makers (those on the other side of the transaction) to buy underlying shares to hedge their positions. This process amplifies price increases, creating a loop where increasing demand leads to additional price surges in the underlying asset. With a limited supply of Bitcoin, this mechanism could trigger a spectacular surge in BTC price.
The Other Side of the Coin: A Moderating Effect on Volatility
Despite these optimistic prospects, other analysts warn that the influx of institutions through IBIT options could ultimately reduce Bitcoin’s volatility. Greg Magadini, Director of Derivatives at Amberdata, explains that institutional flows are often counter-cyclical. In other words, these actors reduce their exposure when prices rise too quickly, thereby curbing excessive increases.
Magadini also highlights that these institutions employ well-known strategies, such as selling covered call options, to generate additional income while limiting their exposure to risks. This strategy involves selling call options at higher strike prices while holding a long position on the underlying ETF. This behavior tends to moderate implied volatility to the upside, a phenomenon already observed in gold markets and could be replicated in Bitcoin with the rise of IBIT options.
