Open Interest in Bitcoin Options Sets New Record for Increased Liquidity

Open interest in Bitcoin options is at an all-time high as increased liquidity points to continued optimism among investors at BTC.

The open interest in Bitcoin options reached an all-time high of USD 2.14 billion on September 24, one day before a huge quarterly expiration of 89,100 contracts, or 47% of the existing option contracts at that time. Options are derivative contracts that give the holder the right (but not an obligation) to buy or sell an underlying asset at a predetermined price, also known as the „strike price“.

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When looking at the trends of open interest before each monthly and quarterly maturity, there are spikes just before the maturity date, and they have been increasing after each maturity, pointing to increased liquidity in the Bitcoin Options Market (BTC) and an increasing number of investors participating in it.

Since the last expiration was the quarterly expiration for the third quarter of 2020, the open interest was expected to increase beyond the open interest observed in the previous monthly expirations of the same quarter. Cointelegraph discussed this further with Shaun Fernando, the head of risk and product strategy at Deribit, a crypto-currency derivatives exchange, who agreed saying that „the trend of open interest increasing at each quarterly maturity means a trend of increasing liquidity of options. Adding:

„The longer a maturity exists, the more open interest can increase as traders take positions in that maturity. So, the March 2021 maturity was introduced at the end of June, giving you more time to build positions as opposed to a daily maturity, which would generally be two days old. Therefore, the quarterly ones are correlated to the open interest“.

In addition to the fact that high open interest is related to the liquidity of the options and the greater number of participants within the market, it could also be driven by larger macroeconomic events within the cryptomoney markets, such as the DeFi-mania and the long-term effects of Bitcoin’s halving on the markets. Lennix Lai, director of financial markets for the OKEx crypt-currency exchange, echoes this assessment by addressing why there is an immediate drop in open interest after maturity:

„Open interest normally correlates with expected uncertainty and events that are expected to have a fundamental impact on the price of the underlying. Therefore, open interest at September maturity is reasonably higher due to the major event that impacted the industry with Bitcoin’s third halving in May and the general turmoil over DeFi, so a higher open interest reflects investors‘ needs to protect themselves with options during the past few months. The subsequent drop in open interest indicates that the need for such event-based risk management is comparatively less now.

The growing trend of open interest in BTC options seems to be a positive sign that better things are coming for the cryptomoney derivatives market, according to Lai: „Indeed! The signal of growing open interest potentially reflects that more participants are entering the market. In addition, any additional market stimulus may create an aggressive scenario for BTC options.

Small price movements

Despite the expected price volatility before this expiration, where almost half of all existing Bitcoin option contracts expire, we didn’t see a significant impact on the price. A major reason for this could be the size of the option/derivative market compared to the BTC spot market. Although investors expect the options and futures market to grow to a larger fraction of the BTC spot market, which has a market capitalization of $194.11 billion. Lai added that „the influence of price is not so strong as to create a large variation,“ adding, „While there is no direct correlation between open interest and the post-price/pre-expiration price in traditional markets, the crypto-currency markets do not stand aside.