Will they or won’t they? That’s the question on the minds of crypto players as they eagerly await the decision of U.S. regulators on whether to approve bitcoin exchange-traded funds (ETFs). While the regulators deliberate, derivatives traders are already placing their bets, anticipating that the Securities and Exchange Commission (SEC) will give the green light to several ETF hopefuls this week, which could have a significant impact on the market.
According to Coinglass, an information platform, open interest in bitcoin futures has been steadily increasing since October and reached $19.2 billion in early December, the highest level in two years. Currently, it stands between $17 billion and $18 billion, a significant jump from the $9.5-$14.5 billion range seen for most of 2023. Analysts at analytics firm Amberdata have stated that the options market has priced in the anticipation of the SEC’s decision since October, creating a heightened sense of anticipation.
The road to U.S.-listed spot ETFs linked to bitcoin has been a long one. Multiple asset managers have applied for permission to launch such ETFs since 2013, but the SEC has consistently rejected them, citing concerns about market manipulation. However, by the end of 2023, the SEC began engaging in discussions with firms interested in issuing ETFs, raising hopes that these long-awaited funds would finally hit the market and attract significant bitcoin investment.
Bitcoin’s funding rates have seen a significant increase across most exchanges this year, indicating that traders are willing to pay more to maintain long positions. According to Coinglass, funding rates have been mostly positive since October. These increases coincided with bitcoin’s rise above the $45,000 level on January 2, following a 170% surge in 2023. The excitement surrounding bitcoin has attracted both retail and institutional investors, leading to soaring premiums for bitcoin futures on the Chicago Mercantile Exchange (CME). Analysts at K33 Research noted that CME’s front-month BTC premium has averaged 42% since the start of the year, a new all-time high, reflecting the market’s strong bullish sentiment.
However, market watchers warn that negative news regarding a spot ETF approval could trigger a wave of selling. After its initial surge, bitcoin’s spot price dropped below $43,000, although it has since recovered. This decline led to a wave of liquidations and a drop of over $1 billion in bitcoin open interest within a few hours, as leverage was flushed out of the market, according to Dessislava Aubert, senior analyst at Kaiko Research. Jag Kooner, head of derivatives at Bitfinex, also cautioned that even if a spot ETF is approved, it could lead to a pullback in prices as investors book profits. This highlights the market’s sensitivity to news and regulatory developments.
In the bitcoin options market, at-the-money implied volatility, which indicates the market’s estimation of likely price movements, is currently at its highest levels in a year, according to data from The Block. Options contracts give buyers the right, but not the obligation, to buy or sell an underlying asset at a predetermined price in the future. Coinglass’ crypto fear & greed index, a measure of market sentiment, is also at a two-month high and firmly in “greed” territory for the past 30 days, indicating elevated levels of “fear of missing out” sentiment among investors.
In conclusion, the anticipation surrounding the SEC’s decision on bitcoin ETFs has reached a fever pitch. Derivatives traders are already positioning themselves, expecting approval and a subsequent surge in the market. However, caution is advised, as negative news or a delay in approval could trigger a significant sell-off. The market’s sensitivity to regulatory developments is evident, and investors are eagerly watching for any signs of a breakthrough in the world of bitcoin ETFs.