Even as bitcoin flies high, investors are keeping their options open, judging by a record race to derivatives.
Open interest for bitcoin options and futures has spiked over the past month as fear has stalked global banking, hitting an all-time high of 433,540 contracts on March 23 on Deribit, a leading exchange for crypto-focused derivatives products.
In the 12 months preceding March, by contrast, open interest ranged between 150,000 and 300,000, referring to the number of contracts yet to be settled between buyers and sellers, which provides a measure of investor participation in a market.
Most options traders are betting on bitcoin prices jumping higher, with open interest in call options at 206,979 contracts on Deribit, more than double the bearish put options of 93,857.
In notional terms, open interest in bitcoin’s most recent peak at $12.24 billion on March 22 was the highest since mid-November when bitcoin was trading near $60,000, according to Deribit data.
“We’ve never seen this much activity before,” said Luuk Strijers, chief commercial officer at Deribit. “We have reached the same levels of open interest as 2021 at half the prices, which means we have doubled.”
Options contracts give their buyers the right, but not an obligation, to buy or sell an underlying asset at a fixed price in the future. Such contracts are not only used as a lower-risk, lower-reward alternative to actually buying bitcoin, but also as a way to hedge other bets, making it a better gauge of investor participation than an indicator of price expectations.
Nonetheless, investors may have good reason to be bullish about the spot price of bitcoin, which has risen 69% in 2023 to about $28,020 making it one of the best-performing assets of the year.
Furthermore, bitcoin futures on the CME exchange are trading in “contango”, meaning future contract prices are trading higher than earlier ones, indicating investors expect prices to keep going up. Futures for April trade at $28,475 while the May contract trades at $28,645, data from the exchange showed.
“This has set up the market for some interesting relative value trades where bitcoin can now be used as a funding or hedging instrument,” analysts at crypto investment firm Matrixport said.
Leo Mizuhara, CEO of digital assets management platform Hashnote, said the macro environment for bitcoin and other digital assets was turning more favorable given the Federal Reserve’s large liquidity injections to shore up the banking sector.
While the recent Fed actions could trickle through to crypto, overall liquidity in crypto spot markets still remains low, which could lead to sharp swings in prices, market participants cautioned.
Bitcoin volatility is hovering around 66, below a peak of 96 hit during March’s banking turmoil but still higher than where it started 2023 at 58, according to data from CryptoCompare.
After an estimated $4 billion of bitcoin options expired at the end of first quarter on March 31, open interest had eased to $8.7 billion on Monday - still at levels not seen in the two years before March.
Investors are still also bullish on ether, judging by options trading. Open interest in ether on Deribit features 1.7 million call options versus 656,158 puts.
The spot price of ether has jumped 50% to $1,795 this year, while the Ethereum blockchain is preparing for another significant upgrade to the blockchain later in April, known as the Shanghai upgrade.
For the past two weeks, though, both ether and its big brother bitcoin have been eerily treading water, leaving investors to place bets on boom or bust.
“Bitcoin has ranged between $26,500 and $29,000 and ether between $1,700 and $1,850,” said Aakash Desai, an options trader at crypto liquidity provider B2C2.
“Breakthroughs in either direction could be interesting.”
