Alts Led the Charge This Week, Unpacking the Impact of IBIT Options

• Bitcoin ETFs recorded nearly $0.5 billion in net inflows over the past week
• PayPal enables business accounts to buy, hold, and sell cryptocurrency
• SEC approves BlackRock's spot bitcoin ETF options listing

Alts led the rally this week, bitcoin accumulation on the rise

Crypto markets rallied this week led by alts posting a 4.7% weekly gain in total market cap of the universe while bitcoin dominance dropped below 57%. Among the blue chips, bitcoin rose by 2.2% while ether outperformed bitcoin, posting a weekly gain of 8.8%. Among the US-listed spot ETFs, the bitcoin universe saw cumulative daily net inflows of $0.5 billion and notably the ether universe saw $34.5 million in inflows over the last 5 trading days.

A recent Glassnode report shows that bitcoin is in a prolonged consolidation phase, similar to trends from late 2019 to early 2020. Capital inflows have slowed since the March peak, squeezing short-term holder profitability. Yet, investor confidence remains solid, with a modest uptick in long positions in perpetual futures. While the market has cooled from its March highs, sentiment among new investors remains strong. 

According to a report from Coindesk, over the last 30 days, bitcoin has witnessed a strong wave of accumulation, with a net 88,000 BTC added—nearly 7x the monthly issuance of 13,500 BTC. This level of accumulation, last seen in Q4 2023, has historically coincided with significant price increases. Smaller retail investors are at the center of this trend. "Crabs" (holders of 1-10 BTC) and "shrimps" (less than 1 BTC) have collectively scooped up 35,000 BTC in the past month, a pattern of steady accumulation that’s been building since May and signaling growing confidence among smaller players. Additionally, 40,000 BTC have flowed out of exchanges over the same period, tightening supply and reducing liquidity. With 74% of the circulating supply now classified as illiquid, this trend suggests diminishing selling pressure and sets a bullish tone for the market.

Shifting from price action to adoption, PayPal announced on Wednesday that it will enable US merchants to buy, hold, and sell cryptocurrency directly from their business accounts. However, this feature will not be available to businesses in New York State at launch. Additionally, PayPal is introducing the ability for US merchants to transfer cryptocurrency externally to eligible third-party wallets on-chain. Business account holders can now send and receive supported cryptocurrencies to and from external blockchain addresses. Since entering the cryptocurrency market in 2020, PayPal has allowed customers to buy, sell, and hold bitcoin and other digital currencies through its online wallets. The company made history as the first major fintech firm to integrate digital currencies for payments and transfers when it launched its dollar-backed stablecoin in August 2023.

SEC greenlights IBIT options; Will they reshape the market structure?

One of the most exciting developments from last week was the US Securities and Exchange Commission’s (SEC) approval for the listing of physically settled options tied to BlackRock's spot bitcoin ETF, the iShares Bitcoin Trust (IBIT). This move signals a potential influx of institutional interest in the crypto market. However, the crypto community appears divided on the implications for bitcoin’s market volatility. While many view the introduction of IBIT options as a way to attract traditional financial firms, others are concerned about how it may impact price dynamics.

Joshua Lim, co-founder of derivatives trading firm Arbelos Markets, provided an insightful perspective on the topic. He noted that the crypto space already has a well-established and liquid options venue, Deribit, which trades approximately $40 billion in notional monthly BTC options. This figure stands in stark contrast to CME’s roughly $3 billion. Deribit may be characterized as an "offshore" and "crypto-native" venue, primarily frequented by retail traders with a penchant for derivatives. However, it's important to note that numerous TradFi firms are actively market making on this platform as well. Consider firms like IMC, Optiver, Citadel, Jane Street, and Susquehanna International Group (SIG)—these companies are drawn to where retail trading volumes present healthy margins, especially in comparison to other macro markets in traditional finance. While it’s true that these firms’ interest in the crypto space has fluctuated over the years, many are likely active on Deribit today. Furthermore, former employees of these firms have established various small, and in some cases substantial, proprietary trading shops focused on Deribit.

Lim pointed out that large institutional users have been actively involved in Deribit, employing various directional and volatility arbitrage strategies. This indicates that traditional finance participants are not encountering BTC options for the first time. However, the rise of zero-days-to-expiration (0-DTE) options traders, particularly those from the r/wallstreetbets community, presents a new dynamic. Liquidity providers in options markets are still wary of the risks associated with such retail-driven volatility, particularly in light of past experiences with stocks like GME and AMC. Despite the potential for a retail-driven short squeeze, Lim argues that the sheer size of bitcoin’s market cap—around $1.25 trillion—makes it much harder to manipulate compared to smaller assets. Historical precedents, such as the Hunt Brothers' attempt to squeeze silver in 1980, illustrate the challenges of influencing a market of this magnitude. Bitcoin's digital-native nature allows for greater financialization and liquidity, especially with products like IBIT and other ETFs that make previously cold-stored BTC available for active trading.

When examining past market reactions, it’s noteworthy that the launch of CME options in January 2020 and ProShares' BITO options in October 2021 did not result in meaningful short squeezes on bitcoin. Both events coincided with local market tops and were influenced by external macroeconomic factors, underscoring that broader market dynamics often overshadow options gamma potential. As we consider the potential implications of IBIT options, several questions arise. First, if the goal is to identify commodities with squeeze potential, why not look toward smaller markets in energy, agriculture, or metals that have less tradable supply? Even within the precious metals sector, commodities like platinum and palladium have smaller total supplies compared to bitcoin. Speculation around gold and silver possibly seeing explosive gains hinges more on their historical roles as hard assets than on a retail-driven squeeze.

Could bitcoin experience a parabolic rise due to its unique attributes as a non-sovereign store of value in an increasingly digital world? It’s certainly possible, but such moves will likely stem more from macro capital allocation inflows than from retail trading dynamics. So, is loading up on IBIT gamma a smart trade? It could be, especially for those who believe in bitcoin's long-term fundamentals. Bitcoin has often been described as a reflexive asset, where its value increases as it gains acceptance as a global store of value. However, holding options can be a waiting game, and without a strong understanding of retail trader sentiment, timing can be tricky.

What about the broader impact of IBIT options? First, they’re expected to boost overall volumes across the derivatives complex. Just as CME options positively influenced Deribit, IBIT options could enhance cross-venue arbitrage opportunities. Additionally, the participation of prime brokers and futures commission merchants (FCMs) may enable risk-netting across ETF and CME products, which existing crypto OTC markets currently lack. Furthermore, new options markets often dampen volatility due to the structured product supply available. The US structured notes market is approximately $100 billion annually, much of which involves volatility selling to generate yield. If some of this capital flows into IBIT-linked notes, even a modest issuance of $5 billion could represent a substantial portion of Deribit’s open interest, currently around $20 billion.

The potential for an altcoin boom also cannot be ignored. Crypto lending has not fully recovered since the last cycle, but as prime brokers begin margin lending against BTC collateral, it could unlock significant liquidity within the ecosystem. This increased availability of USD cash could drive investment into riskier parts of the crypto market, including memecoins, NFTs, and speculative venture capital bets. Finally, we may see basis spreads compress. The futures premium for bitcoin versus spot exists primarily because longs need to maintain exposure via perpetual contracts and futures. With the anticipated increase in USD liquidity, funding rates may decrease, leading to narrower basis spreads.

In conclusion, while IBIT options may not trigger a retail-driven short squeeze, they hold the potential for significant market developments. Enhanced liquidity, cross-venue arbitrage opportunities, and increased participation from traditional finance could reshape the landscape, ultimately benefiting bitcoin and the broader crypto ecosystem.

Macro pulse 

Among TradFi assets, oil futures declined by 1.7% week-over-week, while US equities gained 1.9%. The strong US business activity data, despite slowing growth, boosted optimism for a potential soft landing in the world’s largest economy. Early September saw business activity expand at a slightly slower pace, with expectations weakening and price indicators reaching a 6-month high. Later in the week, the markets largely brushed off a negative consumer confidence report. Elsewhere, the US Dollar index rose by 0.3% and the 10-year US Treasury yields climbed 8 bps while the Gold and Silver index rallied 5.4% week on week.

^{*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on September 26, 2024} 

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