Crypto Market Roundup: Bitcoin Options Open Interest Slows as ETH Options Gain Traction

There has been a lot of excitement in the crypto derivatives market where total bitcoin options open interest skyrocketed over the past month, according to Guilhem Chaumont, CEO of Flowdesk, on Coinscrum Markets. The trend was especially evident on the CME, which is a reflection of demand stemming from institutional investors.

“We were definitely interested in tracking that over the summer. And what we can say is that these volumes have been relatively steady but at the moment they are not getting as much traction as we would have expected,” said Chaumont, adding that open interest is now hovering at about 1% of bitcoin’s total market cap.

While the trading results were pretty good, the market could have expected more based on the activity in past months. On the CME side, for instance, volumes exploded by a factor of 10 in May, Chaumont pointed out, but that momentum has begun to fade.

While it’s hard to say what’s behind this trend, Chaumont believes that it could be a result of a lack of institutional investor interest during the summer months, especially compared to May, which is a trend that is common in the traditional financial markets.

“I’m relatively confident for the remaining part of the year,” said Chaumont.

Implied Volatility

Implied volatility on the bitcoin options started to spike after Aug. 31, while the bitcoin price was trading in the $12,000 area at that time. There was evidently some participation over a three-day stretch in which the bitcoin price went from $12K to $10K, but it’s unclear why the drop happened.

“Clearly some people wanted to bet on the volatility and they did that right before the crash,” said Chaumont.

ETH Options

The DeFi space has made Ethereum great again, and this is spilling over into the ETH options market, which has made for interesting trading in the past few weeks. ETH options in the past couple of months have shown a similar pattern to the bitcoin options market in May, with “huge growing numbers,” Chaumont explained. ETH options currently represent about 1% of the total market cap for Ethereum, and volume is comparable to that in the bitcoin market, which Chaumont says is “very positive.”

The Ethereum implied volatility curve is much higher than the BTC one, which is a function of strong volatility and a strong retracement in Ethereum in recent days.

If there’s one thing that crypto traders know it’s that the markets are hard to predict, even in the short-term. Chaumont says he is looking at the ETH markets because he expects it will be a driver of performance in the broader crypto markets much more than it used to be.

Crypto vs. Traditional Market Trading

Incidentally, Nisa Amoils spoke with David Lifchitz, managing partner and CIO at ExoAlpha, about the parallels between the traditional financial markets and crypto. She asked about the strategies that lend themselves to cryptocurrency trading and those that do not, in response to which ExoAlpha’s Lifchitz said,

“The market infrastructure is not ready yet for high frequency trading. And in terms of the behavior of crypto, there are still illiquid vs. traditional assets. So the trends tend to last longer than in the traditional assets. So for all the trend following…strategies tend to do well in that environment for this asset class at the stage that they are right now. But just a few years ago, when they were even less liquid, it was a lot harder for them to track them. But now there are more liquid products, options and futures of these assets. It basically makes it easier to apply essentially CTAs trading strategies and also market neutral and or market making strategies…But we are not yet at the point of what we can find or what we can do with traditional assets especially in terms of execution and high frequency execution,” said Lifchitz.

flovtec’s  Anton Golub addressed the issue of fake cryptocurrency trading data, which he also refers to as ghost volume and says that it has been an ongoing issue in the digital asset space.

“I can kind of share our experience with regard to fake or ghost volume, how we see it. And indeed this has been somewhat of an issue actually with the digital asset space. There is this ongoing theme and discussion around, there is a lot of fake volume, or just nonexistent and the volume numbers that you see being not representative of what’s actually happening. So I have to actually relate to it from an investment manager perspective. The fake volume, actually you can actually identify it quite easily and then you can shy away from the exchanges that do this kind of practice. But then we always wonder how does it reflect when it really matters? And I’m talking about highly volatile situations where the markets move a lot…and then the question is like from all this fake volume that all of a sudden isn’t there, you can’t do anything with it. Then the question is where can you actually go to trade where this highly volatile environment when you realize the fake volume, these fake volumes don’t actually help you at all. And you actually realize there’s only one or two trading venues that when the volt markets are extremely high, that really show solid liquidity,” said Golub.