Launch Of Bitcoin, Ethereum Micro Options Increases Liquidity For Leading Cryptos

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  • Bitcoin and Ethereum found bottoms in late January
  • Higher lows and higher highs suggest another rally is underway
  • Micro put and call options offer more flexibility
  • Options increase futures liquidity
  • Yet another step in the asset class’s maturation

Options are short-term derivatives that provide market participants with the right but not the obligation to buy or sell an asset at a specified price for a specified period. Put and call options are tools traders, hedgers, and many other market participants utilize to enhance their strategies.

Recently, the Chicago Mercantile Exchange began offering market participants put and call options on Bitcoin and Ethereum futures.

Recall that Bitcoin and Ethereum took off on the upside when the CME rolled out futures contracts on the cryptocurrencies. Bitcoin futures began trading in late 2017; Ethereum futures became available in 2021. In 2021 as well, micro futures on the leading cryptos increased the addressable market for the burgeoning asset class by making it cheaper for traders to participate.

The CME's current move, which launched on Mar. 28, could once again boost the digital tokens as well as exponentially increase the number of derivative products available for trading those assets. Leveraged ETF and ETN products use options to turbocharge price action on the up and the downside.

Just as Bitcoin, Ethereum, and many of the other over 18,700 cryptos look set to move higher, options on the micro futures will improve liquidity and offer market participants more tools with which to achieve their investing goals.

Bitcoin and Ethereum found bottoms in late January

After putting in bearish key reversal trading patterns on the daily charts on Nov. 10, 2021, Bitcoin and Ethereum fell to lows on Jan. 24.

Bitcoin Futures Weekly

Source, all charts: CQG

As the chart above highlights, nearby Bitcoin futures fell from $69,355 on Nov. 10 to $32,855 on Jan. 24, a 52.6% decline. Ethereum Futures Weekly

Over the same period, nearby Ethereum futures dropped from $4,902.75 to $2,158, a 56% correction.

Higher lows and higher highs suggest another rally is underway

The weekly charts show that the two leading cryptocurrencies have made higher lows and higher highs since Jan. 24. Their highly volatile markets have gone from explosive to implosive moves over the past years. The price action since late January is a sign that the cryptos could be building cause for another price explosion over the coming weeks or months.

Bitcoin futures were at the $42,342 level on Apr. 11, almost 30% above the Jan. 24 low. Ethereum futures, at $3,172.50 at time of publication is almost 50% above the January bottom.

Micro put and call options offer more flexibility

The CME’s micro futures contracts on the leading cryptocurrencies are 1/10th the size of one ether and 1/10th the size of one Bitcoin.

The CME’s standard Bitcoin contract contains five Bitcoins, and the Ethereum contract consists of fifty ether tokens. The micro contracts increase the overall market liquidity making trading and investing in futures more accessible to a larger number of participants. Put and call options on the micros enhance liquidity by providing added flexibility and more trading or investing opportunities.

Implied volatility is the primary determinate of put and call option prices. The high level of historical volatility in cryptocurrencies suggests that options contracts on the smaller micro contracts should attract lots of interest as well as trading activity.

Options increase futures liquidity

Higher volume and open interest levels in the micro options translate to more volume in the futures markets. Open interest is the total number of long and short positions in play in a futures contract. Volume is the number of contracts that change hands between buyers and sellers.

Market makers, arbitrageurs, and sophisticated market participants use combinations of options and futures to structure risk positions. For a market maker, the bid-offer spreads for the options are a function of the bid-offer spreads in the futures market. Arbitrageurs use options to create hedged positions with locked-in profits. Other market participants use a combination of options and futures to create spreads and other long or short positions that are a view on price and volatility direction.

Bottom line: introduction of options on the micro contracts should increase volume, open interest, and liquidity in the futures arena for micro and the larger standard contracts.

Yet another step in the asset class’s maturation

As noted above, in 2017 the CME rolled out its first cryptocurrency futures contract on Bitcoin. While the exchange is an SRO or self-regulated organization, it worked closely with the Commodity Futures Trading Commission to introduce futures contracts on the leader of the burgeoning crypto asset class.

ETF and ETN products that followed over recent years and new exchanges like Coinbase Global (NASDAQ: COIN ) worked with the US Securities and Exchange Commission. The leading US regulators have clearly established a path for cryptocurrency products.

Micro options on Bitcoin and Ethereum futures are yet another step toward mainstream acceptability for the digital assets class. Among the over 18,700 tokens floating around in cyberspace, there is substantial growth potential for Bitcoin and Ethereum and beyond. Each new successful product enables liquidity and acceptability to increase.

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