Approval of Bitcoin Options Described as “Unbelievably Fantastic”

While it will take months to assess the full impact of Bitcoin Options, Jeff Park, Head of Alpha Strategies at Bitwise Invest, wrote the following in a recent letter that he posted on X. It’s worth sharing the text in full, which we’ve done so below.

“With today’s approval by the SEC to list and trade Bitcoin ETF options, I shared that we are on the verge of witnessing the most extraordinary upside of vol in financial history. I felt this deserved a fuller explanation, so I want to highlight a few characteristics of Bitcoin, the nature of the regulated options market, and the powerful combination of the two. Without exaggeration, this marks the most monumental advancement possible for the crypto market.

For the first time, Bitcoin’s notional value will be “fractionally banked” with ETF options. What do I mean by that? While Bitcoin’s non-custodial, capped supply is its greatest virtue, it has also been a drag, limiting its ability to create synthetic leverage. Despite Deribit’s efforts, it never adequately solved the counterparty vs. capital efficiency matrix for wide adoption, and CME futures options required too much active management.

Now, for the first time, Bitcoin will have a regulated market where the OCC protects clearing members from counterparty risk. This means Bitcoin’s synthetic notional exposure can grow exponentially without the JTD risks that have kept investors at bay. In a liquidity-driven world, unlocking synthetic flows with leverage represents the greatest opportunity for Bitcoin ETFs, enhancing their financial utility compared to spot markets.

Additionally, Bitcoin can now express duration as part of the leverage calculation for the first time. Retail traders have embraced perps to take on leverage, but these instruments are imperfect—more akin to a series of daily DOTF options that must be rolled over constantly. With Bitcoin options, investors can now make duration-based portfolio allocation bets, especially for long-term horizons. There’s a good chance that owning long-dated OTM calls as a premium spend will give investors more bang for their buck than a fully collateralized position that could drop by 80% over the same period. People often compare Bitcoin to a call option due to its premium decay and occasional explosive upside. Now, you can bet on “vol of vol” to the upside with the same or less premium, while capturing more delta over a longer timeframe—an extremely compelling opportunity.

Bitcoin also has unique volatility characteristics, and one of the most important is the “volatility smile.” Most equities/indices display a “volatility skew,” where upside vol is cheaper than downside vol (i.e., protection is more expensive than speculation). Bitcoin is unique because melt-ups are as frequent as melt-downs, so the market demands a risk premium on both sides. The practical implication? It’s seen in the second-order Greek called vanna. Historically, with all options, as spot rises, implied volatility tends to fall. So while the option delta increases (becoming more ITM), the rate of increase slows—this is positive vanna (dΔ/dvol), which creates a sort of drag. However, Bitcoin options have negative vanna: as spot goes up, so does volatility, meaning delta increases even faster. When dealers who are short gamma hedge this (a gamma squeeze), Bitcoin’s case becomes explosively recursive. More upside leads to even more upside, as dealers are forced to keep buying at higher prices. A negative vanna gamma squeeze acts like a refueling rocket.

The most crucial factor that ties all of this together: Bitcoin itself cannot be diluted to accommodate this newfound leverage. Compare this to stocks like GME or AMC, where management can issue new shares to exploit pricing anomalies, putting a cap on the stock’s rise. Bitcoin can never do that. You might ask: “But Jeff, what about commodities like oil or natural gas? Aren’t they comparable, and if so, why is Bitcoin different?” The key difference is that most physical commodities have expiration dates, meaning they tend to trade with the futures market, not the spot market. Futures markets, unlike spot markets, vary in gross and notional exposure based on expiration dates and not interests of physical vs paper, so they don’t allow focused participation in one direction (i.e., people trade both long and short on the curve, and physicals vs paper). Furthermore, these markets are subject to supply bottlenecks by groups like OPEC, among others.

In summary, the Bitcoin ETF options market is the first time the financial world will see regulated leverage on a perpetual commodity that is truly supply-constrained. Things will likely get wild in such scenarios, regulated markets may not be able to handle.

But the remarkable thing about Bitcoin is that there will always be a parallel, decentralized market that can’t be shut down, unlike CME—which, as you can imagine, will add even more fuel to the fire.

It’s going to be unbelievably fantastic.”