By Keeping Its Options Open, the Crypto Market Is Evolving Into a Different Beast

While the crypto market continues to stumble along in a bearish state, options trading has come to represent a silver lining in the ongoing storm.

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Options trading volumes have increased across global crypto exchanges, with institutional investors increasingly trading crypto options to hedge their bets in an uncertain environment, while even Bitcoin miners are embracing trading strategies in an attempt to chart a course through untested waters.

The impact of the trend is already highly visible. Earlier this month, in a disappointing second-quarter earnings report, crypto exchange giant Coinbase (COIN) referenced traders migrating to derivatives-focused platforms as a reason for declining trading volume. Coinbase's dipping volume led to a 30 per cent decline in the company's revenue, below most analysts' estimates.

Such trends bear witness to the evolution of the crypto market through natural selection, with the mutations only likely to continue. Despite some promising macro-economic signs, soaring inflation across the world and a looming global recession could well prolong the crypto winter into the latter half of this decade. To survive, the crypto market needs to think outside the box and keep its options open.

In doing so, it's imperative to keep in mind the relative infancy of crypto options trading, and by the same token, its potential for extraordinary growth. As EDG CEO Chris Bae has noted, crypto options trading volumes "have yet to hit their j-curve when it comes to their adoption and growth".

Presently, the focus remains on a narrow set of 'blue-chip' crypto assets, namely on Bitcoin (BTC) and Ethereum (ETH), with many traders for example hedging positions on highly anticipated market developments such as the Ethereum blockchain's imminent 'merge' event, which will see the current Ethereum Mainnet merge with the Beacon Chain proof-of-stake system, marking the end of proof-of-work for Ethereum, and the full transition to proof-of-stake. However, such market moving events are few and far between.

Growth is likely to come from two places. Firstly, these assets are likely to become a higher proportion of trading volume. Currently, Bitcoin options trading accounts for only 2 per cent of open derivatives contracts across exchanges trading the cryptocurrency, whose market cap is about $462 billion, according to structure product provider Enhanced Digital Group (EDG).

Regulatory clarity on the legal status of leading digital assets, and permission to incorporate them into exchange-traded funds (ETFs) are the catalysts required to kick-start this growth. As EDG's quant developer Marcin Maksymiuk recently stated, "When you think of all the other [S&P 500]-like products including [exchange-traded funds], SP Minis, etc., you can see that bitcoin options have multifold growth ahead of it."

Unfortunately, regulatory hesitancy continues to prevail in this sphere, with the SEC recently rejecting Grayscale's Spot ETF application, despite the company's comprehensive efforts to win approval. Proponents of a spot bitcoin ETF approval have argued the product would offer a low-cost and easily accessible way for individuals and institutions to invest in bitcoin.

Optimism about an approval began to grow in after a number of bitcoin futures-based ETFs were approved last autumn, and two further futures ETF approvals earlier this year based on the Securities Exchange Act of 1934, the same act under which spot bitcoin ETFs have been filed.

For what it's worth, Grayscale has protested that it is not consistent to approve an ETF based on bitcoin futures but not allow one based on the underlying investment. I am personally confident that a Bitcoin-based spot ETF will inevitably be greenlighted. It is only a matter of 'when', not 'if', and when it happens, the market capitalisation of Bitcoin and other crypto assets will balloon, spurring further demand and investment as the fear of missing out takes hold.

Secondly, the markets will likely tie options to a widening range of digital assets, not just BTC or Ether. This doesn't just mean less conventional cryptocurrencies, like Cardano or Solana, but a wide spectrum of digital assets, whether NFTs or – in the longer-term – tokenised assets ranging from commodities to real estate, the winning digital infrastructure for which is yet to emerge. Once it does however, we won't just be dabbling in a digital asset market, we will be living within a digital asset ecosystem.

In short, the growth of crypto options relies on the convergence of a number of factors, including technological improvements and bold regulatory action, not just sudden market shocks. As the market clears these hurdles over time, there is no reason for options not accounting for 70 per cent of the crypto trading market.

At Bit.com, we think that options trading can help put the wind back in the crypto industry's sails - that's why we will be launching a new, best-in-class USD- options trading service for our users, allowing them to gain exposure to a range of markets and hedge risks amongst them, as they wish.

The new service reflects our belief at Bit.com that natural selection does not reward the strongest players, only the most adaptable. This is not the first time that news of crypto's demise has been greatly exaggerated. There is no doubt that winter is coming, but the crypto industry will not die out. We're only going into hibernation, and likely to emerge as a very different beast.