Bitcoin Derivatives Volume Suggest Institutional Players Are Here, But Its Not Signaling What You Think – Forbes

Woman's hands hold Gold Bitcoin on a thread

The long-time rallying cry for digital asset participants since 2018 is that you better get in now, because institutional investors are coming. Prior to 2020, that narrative had largely failed to materialize.

However, a post-COVID-19 world has seen several economic and financial dislocations, including dramatic monetary expansion by the Federal Reserve, skyrocketing unemployment, corporate bailouts, and a surging fiscal deficit. All of the above amidst the backdrop of bitcoins supply issuance rate being reduced for the third time.

https://fred.stlouisfed.org/series/WALCL

The aforementioned has made notable investors, including Paul Tudor Jones, publicly state their existing investments or intentions of investing in bitcoin.

The proverbial blessing from the smart money appears to have opened the floodgates for legitimate, institutional interest, which was recently co-signed by Bloomberg in the now famous, Price will rise unless something goes really wrong report.

The past three months have shown a demonstrable increase in bitcoin Options Open Interest. The most notable being the CME, which has skyrocketed from $4 million to $373 million over the period. The dramatic rise lends further credence to the institutionalization of the bitcoin space because many large investors are either prohibited from holding bitcoin outright or do not trust the current custody solutions, which makes regulated futures and options contracts via the CME the preferred avenue.

https://skew.com/

Furthermore, per Skew, the Put/Call ratio has fallen dramatically since the end of May from 0.65 to 0.41. Anecdotally, a ratio above 0.75 is a high probability of a bear reversal, whereas a ratio below 0.50 is a high probability of a bull reversal. Furthermore, the ratio is at its lowest level since Skew began compiling the metric.

https://skew.com/

On the surface, the dramatic increase in options open interest appears to have flooded into call options, which looks quite bullish when analyzing the put to call ratio. However, digging a little deeper into options breakdown yields an alternative conclusion.

Zach Le of Pirata Capital Management notes that analyzing OTC action suggests that a more likely scenario is that sophisticated investors are currently net short bitcoin and are using the call options to hedge their short exposure.

For example, below is a simulated yield curve for individual short 1 bitcoin and long 1 June 26 $11,000 call option.

https://www.deribit.com/

Le notes, the aforementioned structure is a far more efficient way to essentially set a stop loss at a key resistance level, e.g. $11,000 without the fear of being stopped out by wick hunting, which might occur with just a normal short position with a stop loss on an exchange.

He further notes there is a lot of utility in these calls options given where we are in price action, how low volatility is, and how wound up the market is, but I think a lot of traders are overlooking this because derivatives are mostly seen as a speculative tool.

Further credence to this slightly bearish notion can be found in bitcoins lack of ability to surpass the key $10,000 level yesterday despite the Fed Chair Jerome Powell stating their intention to keep interest rates close to zero through 2022, while pumping at least $120 billion a month into the financial system for the foreseeable future.

Update: At the time of writing, bitcoin has fallen approximately 7% from yesterdays highs, and is currently trading around $9,300.

The author owns bitcoin and Ethereum at the time of writing.

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Bitcoin Derivatives Volume Suggest Institutional Players Are Here, But Its Not Signaling What You Think - Forbes