SEC approves options for BlackRock's Bitcoin spot ETF

The Securities and Exchange Commission (SEC) approved options trading based on BlackRock's Bitcoin spot ETF ($IBIT) last Friday, according to an official document from the US Securities and Exchange Commission.

The IBIT options, which have yet to be approved by the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC), could help to further drive the institutional adoption of Bitcoin. This is certainly the opinion of Michael Saylor, the founder of the public limited company MicroStrategy, which cracked the 250,000 Bitcoin mark on its balance sheet last week.

A few months ago, Saylor cited the lack of approval for Bitcoin spot ETF options in the context of the rather hesitant regulatory approach to Bitcoin. He explained that this would still slow down the ETFs.

Bloomberg ETF expert Eric Balchunas emphasized in the context of the approval that the asset class should now attract more liquidity and that the options for further Bitcoin spot ETFs should be given the green light in the near future.

The approval of the long-awaited options based on the Bitcoin spot ETFs only led to a small price increase on Friday. In the medium to long term, however, the significance of this should not be underestimated. Jeff Park from asset manager Bitwise called "this marks the most monumental advancement possible for the crypto market" and he even predicts a "gamma squeeze".

With options, the traders or market makers act as counterparties. If many market participants use the instruments to bet on a rising price and the price then rises, the traders must hedge their risks to a greater extent. They do this by buying the underlying asset, i.e. the Bitcoin spot ETF, which in turn leads to further price rises.

As the supply of Bitcoin cannot be increased in such a case, Park is setting the stage for a veritable price explosion.

In summary, the Bitcoin ETF options market is the first time the financial world will see regulated leverage on a perpetual commodity that is truly supply-constrained. Things will likely get wild. In such scenarios, regulated markets may shut down.

But the remarkable thing about Bitcoin is that there will always be a parallel, decentralized market that can't be shut down, unlike GME—which, as you can imagine, will add even more fuel to the fire.

It's going to be unbelievably fantastic.
_{Jeff Park}

On the other hand, there are also increasing voices claiming that the further increase in institutional adoption due to the options market could also lead to a significant reduction in the sharp price swings that are still common for Bitcoin.

It remains to be seen how options trading based on Bitcoin spot ETFs - provided the OCC and CFTC give the green light - will affect the adoption and price of the asset. In terms of regulation, this is another milestone. All that remains is for the "in-kind method" for Bitcoin spot ETFs to be permitted, allowing investors to swap their BTC directly for ETFs and vice versa.

The SEC's SAB 121 directive, which makes it extremely difficult for financial institutions to hold Bitcoin in custody on behalf of their clients, is another current brake factor. Although President Biden vetoed H.J.Res. 109, which would have overturned SAB 121, there are already serious reports that one or more large banks will now be exempt.

Institutional adoption of Bitcoin is only likely to increase in the coming months and years as the environment continues to improve. Approvals of this nature give the fledgling asset class additional legitimacy, which is essential in the traditional financial world.