Investors who thrive on bitcoins wild price fluctuations can be disappointing. Major banks are preparing to introduce new products that could dampen volatility in a market that has already become significantly calmer in recent years.
Most recently, Goldman Sachs filed for a Bitcoin Premium Income exchange-traded fund (ETF). The proposed fund relies on selling (writing) options linked to bitcoin-linked exchange-traded products to generate income while giving investors exposure to the cryptocurrency. BlackRock is looking to launch a similar product.
Selling options is essentially writing insurance against price fluctuations. The writers collect a premium in return for providing downside or upside protection while being exposed to potentially significant losses if the market moves sharply. Traders often use hedged strategies — holding the underlying asset or ETFs while writing options — to partially offset the risk.
If approved, the ETFs could use similar covered options strategies to generate returns, although the exact structures will vary from product to product.
Whatever the case, the net effect would be calmer market conditions. That’s because when options are sold in large numbers, traders or market makers who take the other side of those trades end up with long positions. To manage their risks, these entities then dynamically hedge by buying the underlying asset on dips and selling on rallies. This dynamic is called hedging the positive gamma exposure, and it tends to limit volatility.
In addition, the availability of institutional-grade yielding products can siphon capital away from purely speculative bets, further lowering realized volatility over time. Bitcoin’s implied volatility has been declining for three years, primarily due to the growing popularity of options selling strategies.
Today bitcoin has pulled back to $74,000 after hitting highs near $76,000 on Tuesday. The CoinDesk 20 Index has fallen over 1% in 24 hours.
A solid breakout is expected to occur if US stock indexes hit new record highs.
“If Bitcoin is looking for external signals, it may remain indecisive until the main US stock indices hit new highs. However, we are more inclined to believe that the first cryptocurrency’s stagnation is a sign of a fragile risk appetite that will soon manifest itself in the broader market,” said Alex Kuptsikevich, chief market analyst in an email to FxPro.
Meanwhile, the IMF flashed a warning about rising global debt, bolstering the bull case in bitcoin. Pay attention!
Read more: For analysis of today’s activity in altcoins and derivatives, see Crypto Markets Today. For a comprehensive list of events this week, see CoinDesk’s “Crypto Week Ahead.”
What is trending
Today’s signal
Bitcoin is struggling to rise past its 100-day simple moving average, a much-watched technical level that reflects the average close over the period.
This pattern is reminiscent of mid-January, when sellers regained control at the 100-day average and stopped the rally. Bitcoin experienced a sharp decline in the following days.
The question now is whether history will repeat itself or if this time the level finally gives way, paving the way for faster gains to $80,000 and higher.
