In today’s newsletter, independent digital asset commentator Dumpling Bullish writes about the growing influence of bitcoin’s derivatives stack on its price.
Then, in Ask an Expert, Leo Mindyuk from ML Tech answers questions about the development of bitcoin investment products.
-Sarah Morton
Bitcoin price discovery: no longer just a demand story
For most of its history, bitcoin had a simple pricing logic: limited supply, growing demand, and the occasional panic in between. That logic still exists. It just doesn’t run the show anymore.
What runs the show now is the derivatives stack that sits on top of the asset.
From spot market to leverage system
Over the past decade, bitcoin has moved from a predominantly spot-driven market to a layered derivatives ecosystem. Futures, perpetual swaps, options, exchange-traded funds (ETFs), structured products and prime brokerage loans have changed the way price discovery takes place.
CME futures launched in December 2017, giving institutions a regulated, scalable way to short bitcoin for the first time and providing a mechanism to express bearish views at the top of what had been a 19x run. The asset experienced a move of 80%. It didn’t kill bitcoin. It made it possible to price disagreement more effectively.
Then came the 2024 ETF approvals that served as the basis for a new derivatives layer in the US stock markets.
Each addition did not change what bitcoin is. It changed where and how price was discovered.
Three variables that now matter most
Real interest rates and dollar strength set the macro background. Bitcoin has increasingly traded as a high-beta liquidity asset, and when global risk appetite contracts, it sells out along with stocks and other risk assets, regardless of what the blockchain is doing.
Bitcoin 30-Day Rolling Correlation with Nasdaq (QQQ), 2011 – Present
Source: Newhedge
Derivatives positioning tells the short-term story. CME’s open interest and perpetual finance rates reveal whether a price movement is built on genuine new demand or on leveraged speculation that will eventually unwind violently. When funding rates are persistently positive, the market pays a premium to be long – and that premium is a signal of fragility.
Bitcoin CME Futures Open Interest and Price, Dec 2017 – Now
Source: CME Group via TradingView
ETF options mechanics have introduced a new transmission channel. When institutional investors buy calls or puts on the iShares Bitcoin Trust ETF (IBIT), traders selling these options must hedge by trading the underlying ETF and, in some cases, related futures or spot exposure. This hedging is procyclical. When Bitcoin goes up, the traders have to buy more; when it falls, they must sell. Modest directional movements are mechanically reinforced. The result is that a meaningful share of Bitcoin’s short-term volatility is now primarily generated by the structure of the stock market.
Financing is not extinction
Gold offers a useful parallel. The development of futures and ETFs did not remove the scarcity of gold. It integrated gold into global macro portfolios and amplified its volatility during liquidity cycles. Bitcoin is undergoing a similar integration process at a faster pace. It is being absorbed into the global risk budget system. This absorption brings institutional capital, liquidity and legitimacy. It also brings correlation, reflexivity, and occasionally violent relaxation driven by forces unrelated to protocol.
Scarcity remains intact at the protocol level. But its impact on price is increasingly subordinated to the cost of capital and the mechanics of the derivatives stack. Bitcoin is not losing its scarcity narrative. It is getting a liquidity identity.
Scarcity anchors the asset. Liquidity sets the marginal price.
– Dumpling Bullish, independent digital asset commentator
Ask an expert
Q: Over the past few years, bitcoin investment products have expanded from spot exposure to futures, options and ETFs. How do you see the evolution of bitcoin financial products shaping the way investors access the asset?
The evolution of bitcoin investment products mirrors the path we have seen in traditional asset classes. Early entrants primarily gained access to bitcoin through direct ownership – by buying and holding the asset itself on crypto exchanges. Over time, as institutional interest increased, the market began to develop a broader toolset: regulated futures and options, structured products and regulated fund structures and, more recently, spot ETFs.
This expansion is important because it changes bitcoin from being just a speculative asset to something that can be integrated into portfolio construction and risk management frameworks. Different investors have different needs. Some want direct exposure to the asset’s price movements, while others want regulated vehicles, derivatives for hedging, or ways to express more nuanced market views.
As the ecosystem matures, financial products make Bitcoin easier to access through familiar structures, lowering barriers for institutional investors and expanding the ways the asset can be incorporated into diversified portfolios.
Question: In traditional markets, financial products often evolve from simple exposure to more complex structures such as leveraged, inverse and derivative strategies. Are we starting to see a similar progression in the bitcoin ecosystem?
Yes, and it’s a natural progression. In most asset classes, markets begin with simple spot exposure and gradually develop layers of financial instruments that allow investors to manage risk, hedge positions or express different market views. Bitcoin follows the same trajectory.
In the beginning, the focus was simply on gaining exposure to the asset itself. Today we see a more developed ecosystem that includes derivatives, volatility trading and structured products. These tools allow investors to do much more than just speculate on price increases. They can hedge downside risk, trade volatility or construct market neutral strategies.
The interesting thing is that crypto markets often develop faster than traditional markets because the infrastructure is digital and global. As liquidity deepens and the regulatory framework becomes clearer, we are likely to see even more sophisticated products emerge that resemble strategies commonly used in equity, commodity and fixed income markets. For example, I expect growth in various income-generating ETFs – instruments for inverse, leveraged or broader crypto factor-based exposure. Furthermore, we are likely to see tremendous growth in the crypto options markets.
Question: With the growth of futures markets and the introduction of spot ETFs, how can the next generation of bitcoin products expand investor use cases, whether for hedging, leverage or more sophisticated portfolio strategies?
Futures markets already allow investors to hedge exposure or express directional views without holding the asset directly. ETFs have made bitcoin accessible through traditional brokerage accounts. The logical next step is products that focus on portfolio performance.
As it happens, bitcoin is starting to look less like a standalone trade and more like a portfolio building block. Ultimately, that’s where the market is headed: giving investors the flexibility to express their views about the market in much more nuanced and sophisticated ways with easy access.
– Leo Mindyuk, CEO & CIO, ML Tech
