Hello readers,
Welcome to our institutional newsletter, Crypto Long & Short. This week:
- Gregory Mall on how ETFs have shifted a growing share of bitcoin volatility to US equity options markets
- Top headlines institutions should be aware of by Francisco Rodrigues
- Mid-caps show surprising strength in the Chart of the Week
Thanks for joining us!
-Alexandra Levis
Expert insight
When ETF options start driving bitcoin
– By Gregory Mall, Chief Investment Officer, Lionsoul Global
The launch of US spot bitcoin ETFs marked a structural turning point. The iShares Bitcoin Trust ETF (IBIT) quickly became one of the fastest growing ETFs in history, pulling tens of billions into a regulated vehicle. Less discussed, but equally important, is what followed: the rapid expansion of IBIT capabilities.
Over the past year, open interest in IBIT options has surged into the multi-billion dollar range. In select high-volume sessions, activity has approached levels historically associated with Deribit, cryptocurrency futures and the options exchange. A meaningful share of bitcoin’s convexity now resides in the US stock options markets instead of offshore crypto venues.
That shift matters because it changes how volatility is transmitted.
From offshore leverage to onshore gamma
For most of its history, bitcoin volatility was driven by offshore perpetual futures. Funding imbalances, building leverage and liquidation cascades shaped price action.
ETF options introduce another mechanism.
When investors buy calls or puts on IBIT, dealers typically sell the option, hedging delta exposure. If traders are short gamma, which is common when investors are net long options, they should buy when the price rises and sell when the price falls. These hedging flows are procyclical in nature and can amplify underlying movements.
Because IBIT has physical bitcoin, hedging does not remain limited to the wrapper. Arbitrage and creation and redemption flows transfer ETF positioning to the underlying market. Bitcoin increasingly participates in the same positioning mechanics that affect stock indices.
The structure of ETF options markets, where investors are generally net long optionality, suggests that traders often store short gamma during periods of high demand. This dynamic likely intensified during the February episode, when volatility had subdued and crypto-native participants accumulated downside puts. Sustained option buying in a low volatility regime leaves market makers short convexity across both ETF and offshore venues. When the spot breaks, cover currents can reinforce the feedback loop. In the graph below we show the movement of IBIT option volume and BTC US hours realized volatility. We can see that the relationship has strengthened over recent weeks.
Figure 1 illustrates the co-movement between IBIT option volume and BTC US hourly realized volatility, showing that their relationship has strengthened in recent weeks. To formally evaluate this relationship, we regress bitcoin realized volatility on lagged IBIT option volume while controlling for BTC funding rates, stock returns (Nasdaq Composite), implied volatility (CBOE Volatility Index or VIX), short-term interest rate changes, and US dollar movements. The results indicate that IBIT options trading activity is significantly associated with BTC volatility even after accounting for broader macroeconomic conditions.
Figure 1: Movement of IBIT Option Volume and BTC US Hours Realized Volatility
Table 1: OLS Regression IBIT Option Volume on BTC Volatility
Table 2: BTC volatility distribution before and after IBIT options
We split the data into before and after IBIT options started trading. For each hour of the day (UTC), we measure how much bitcoin’s price moved in that hour. Then we convert that to a share of the day’s total volatility — so each column adds up to 100%. The highlighted band (14:00-16:00 UTC) is consistent with peak US trading activity, particularly the US cash stock open. After that, volatility in IBIT options becomes more concentrated during these US hours – suggesting more price discovery and hedging flow occurs when US markets are most active.
February as an illustration
The sale at the beginning of February is a useful example. Bitcoin fell sharply during one of the most extreme episodes of cross-asset deleveraging in recent years. Still, IBIT recorded net creations rather than redemptions, arguing against retail panic.
In a thoughtful Substack post, Jeff Park suggested that the catalyst was cross-asset positioning amid some of the big multi-strategy funds, rather than crypto-specific stress. Correlations between bitcoin and high-beta software stocks tightened significantly, suggesting that multi-asset portfolios were arbitrarily removed.
At the same time, the CME bitcoin base expanded dramatically. The near-dated basis moved from around three percent to close to nine percent. Such a move is consistent with multi-strategy funds settling delta-neutral basis trades by selling spot or ETFs and buying futures under gross exposure limits.
As prices fell into that environment, existing short gamma positioning may have amplified the downside through mechanical delta hedging. Traders’ short convexity must sell for weakness. The sharp recovery that followed on Friday the 6th is consistent with hedges rebalancing as the acute pressure subsided.
The episode illustrates a broader point. Bitcoin now participates in the same balance sheet and derivative mechanics that govern stocks and other risk assets.
Digital gold or leveraged Nasdaq?
This development complicates the “digital gold” narrative. Bitcoin’s correlation with gold has historically been volatile and often close to zero over shorter horizons. BlackRock’s Head of Digital Assets, Robert Mitchnick, has argued that heavy speculative positioning can make bitcoin behave more like a leveraged Nasdaq proxy than a macro hedge. This observation is directionally correct. In Figure 3, we show that the BTC-Nasdaq correlation during US trading sessions has approximately doubled since the inception of IBIT options. Increasingly, however, it is not just speculative lengths that matter. Delta-neutral strategies and derivative positioning in traditional markets now contribute to volatility feedback loops.
Figure 2: Bitcoin’s correlation with Nasdaq pre- and post IBIT options
Bitcoin began outside the financial system. The success of IBIT and IBIT options shows that it is now embedded in it. For long-term allocators, this does not invalidate the structural case for digital scarcity. This means that short-term price action is increasingly shaped by positioning, hedging and cross-active flows.
Bitcoin no longer trades outside the system. It acts within it.
The information contained herein is provided for informational and educational purposes only and should not be construed as investment, legal or tax advice. Nothing contained in this document constitutes an offer to sell, or a solicitation of an offer to buy, securities, investment products or advisory services.
Lionsoul Global Advisors LLC is registered with the Texas State Securities Board (CRD #: 324883). The advisory services provided by Lionsoul Global Advisors are available only to non-US investors who meet applicable eligibility, accreditation and qualification standards under applicable laws and regulations.
This week’s headlines
– By Francisco Rodrigues
Trump’s Mar-a-Lago crypto summit would have been unthinkable just a few years ago. Now we get not only that, but also a debut of $17 billion in trading volume of a crypto-linked ETF and more in a single week.
- Goldman Sachs, Franklin Templeton and Nicki Minaj: Inside Trump’s Surreal Mar-a-Lago Crypto Summit: The World Liberty Financial form at Mar-a-Lago included figures from traditional finance, crypto and real estate in an intimate setting, with panels touching on crypto and the future of tokenized real estate.
- To Freeze or Not to Freeze: Satoshi and the $440 Billion in Bitcoin Threatened by Quantum Computing: Quantum computing is slowly moving closer to reality, and as it does, nearly 7 million bitcoins could potentially be at risk. That includes Satoshi Nakamoto’s estimated 1 million BTC.
- ProShares’ stablecoin-ready ETF makes $17 billion debut, fueling speculation Circle: ProShares’ IQMM money market ETF, designed to meet the U.S. stablecoin reserve requirement under the GENIUS Act, saw $17 billion in first-day trading. That sparked speculation that stablecoin issuers could move funds.
- Bitcoin Balances on Binance Hit Highest Since November 2024 – Here’s What That Means: Users’ bitcoin holdings in Binance-linked wallets are at their highest level since late 2024, which could have bearish implications on an already depressed market.
- Specialized AI detects 92% of real-world DeFi exploits: Purpose-built AI could detect vulnerabilities in 92% of 90 exploited decentralized finance (DeFi) contracts, raising concerns about offensive AI capabilities.
Chart of the week
Mid-caps show surprising strength as large caps lag bitcoin
While Bitcoin is down 27.7% YTD and major indexes like CD5 and CD20 are underperforming (down 30% and 32% respectively), CD80 is showing resilience with a minor move of just 20.91%. This represents a 7% relative outperformance against Bitcoin, a reversal of the typical “risk-off” dynamic where smaller assets crash harder than the leader. This strength suggests a “seller exhaustion” phase for mid-caps, where the heavy weighting of idiosyncratic performers like Hyperliquid (HYPE) and Canton Coin (CC) is decoupled from the broader institutional selloff seen in large caps.
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