Bitcoin ETF Options Approved: Will Institutional Investor "Gamma Squeeze" Drive a Surge in Bitcoin Prices?

Bitcoin ETF Options Approved: Will Institutional Investor "Gamma Squeeze" Drive a Surge in Bitcoin Prices?Cryptocurrency bulls are anticipating that the approval of Bitcoin ETF options will enable institutional investors to implement more trading strategies, some of which could drive a significant increase in Bitcoin prices. Investors are closely watching whether and when the Options Clearing Corp

Bitcoin ETF Options Approved: Will Institutional Investor "Gamma Squeeze" Drive a Surge in Bitcoin Prices?

Cryptocurrency bulls are anticipating that the approval of Bitcoin ETF options will enable institutional investors to implement more trading strategies, some of which could drive a significant increase in Bitcoin prices. Investors are closely watching whether and when the Options Clearing Corp. (OCC) and the Commodity Futures Trading Commission (CFTC) will approve options for iShares Bitcoin Trust ETF. This follows the US Securities and Exchange Commission (SEC)'s approval last month of Nasdaq's application to list such a product.

While there are already numerous crypto options products available in the market, many are either lightly regulated or entirely unregulated, hindering participation from some institutions due to compliance concerns. Elizer Ndinga, Head of Digital Assets Strategy & Business Development at 21Shares, suggests that the approval of Bitcoin ETF options would allow more institutional investors to utilize these instruments for executing various strategies.

Covered Call Strategy: Potential Bullish Driver

For example, investors would be able to implement a covered call strategy, where an investor holding a certain asset sells call options on that asset to generate income. Call options give the holder the right, but not the obligation, to buy the underlying asset at a specified price before the expiry date.

"Gamma Squeeze": A Potential Catalyst for Bitcoin Price Increase

Additionally, with the launch of Bitcoin ETF options, investors could anticipate a so-called "gamma squeeze." This phenomenon typically occurs when an asset experiences a large influx of buying in a short period. When institutions sell these call options, they are required to buy the underlying asset to hedge their positions. As the asset price rises, they will have to purchase more to maintain their hedge, further pushing the asset price higher. The surge of GameStop (GME.US) in 2021 was a result of such a gamma squeeze.

Jeff Park, Head of Institutional Strategy at Bitwise Asset Management, suggests that the impact of gamma squeeze on Bitcoin could be more profound than on traditional assets. He points out that traditional assets such as stocks and bonds have a valuation framework, which does not apply to Bitcoin. Park explains: "Technically, a stock can't be squeezed forever because at some point, the company will issue new stock, or the shorts will come in and push the price back down to a rational level. Bitcoin doesn't have those dynamics, meaning there is almost unlimited room for it to run higher."

Contrasting Views on "Gamma Squeeze" Among Market Participants

However, Park acknowledges that it is uncertain how popular the use of covered call strategies using Bitcoin ETF options will be. He points out that there are actually very few large players in the cryptocurrency options market who are currently profiting by selling covered call options.

Darius Tabai, CEO of the decentralized exchange Vertex, argues that the possibility of a massive gamma squeeze in Bitcoin is relatively low. He explains that this phenomenon occurred with "meme stocks" like GameStop because they didn't have futures contracts, making them difficult to short. Bitcoin, however, has a well-established futures market that allows for easy shorting, making it less likely to be squeezed, thus disrupting the logic of a gamma squeeze.

Impact of Bitcoin ETF Options Approval Remains to Be Seen

In summation, the approval of Bitcoin ETF options will provide more tools for institutional investors to participate in the Bitcoin market, which could potentially drive a rise in Bitcoin prices. However, the emergence of a gamma squeeze and its impact on Bitcoin prices remain to be observed.

Source: Jingtong Finance