【LongHash Column】The recent surge in Bitcoin is fueled by the explosive growth of the options market

Over the past six weeks, the price of Bitcoin has remained stable above $9,000, even breaking the $10,000 mark three times since May 7. Compared to the price cycles in 2019 and early 2020, Bitcoin is currently showing strong momentum.

The performance of the Bitcoin market in the third quarter of 2020 differed from previous quarters in that the options market experienced explosive growth. The Bitcoin market is mainly divided into four submarkets: spot, options, futures, and institutional markets.

Spot refers to Bitcoin trading without capital borrowing or leverage. Options allow investors to purchase contracts for Bitcoin or other cryptocurrencies at a predetermined price within a specific time frame, primarily used by professional traders. Futures contracts allow investors to trade Bitcoin with additional capital, with leverage of up to 125 times supported by Bitcoin exchanges currently. Lastly, the institutional market facilitates transactions for institutional investors such as hedge funds, family offices, or pension funds.

Until early 2019, the Bitcoin market was mainly dominated by spot and futures exchanges. Coinbase, Binance, and BitMEX held a significant share of the daily Bitcoin trading volume.

Over time, investment institutions like Grayscale Bitcoin Trust and options exchanges like Deribit saw rapid growth in trading volume and open interest.

According to Grayscale's Q1 2020 Digital Asset Investment Report, the open interest in the options market remained above $1.5 billion as of June 15th. Open interest is a term used to describe the total value of all outstanding options contracts in the market.

Specifically, Deribit held $1.1 billion in open interest in the options market, accounting for approximately 70% of the market share. In February, Deribit reportedly sold a 10% stake, valuing the company in the nine digits.

The trading volume of Bitcoin options on the world's largest financial derivatives exchange, CME, also hit a historical high in May. According to Skew, with the current trend, CME is set to continue breaking its historical monthly trading volume record in June.

The combined growth of trading volume, open interest, and trading activities in the Bitcoin options market indicates a significant influx of professional traders.

If retail investors dominated the spot and futures markets in 2018 and 2019, professional traders and institutions may account for a significant portion of Bitcoin trading volume in 2020.

During a recent client call, Goldman Sachs acknowledged that institutional investors may be attracted to the volatility in the cryptocurrency market. The bank's wealth management division stated:

"We also believe that while hedge funds may be attracted by the high volatility of cryptocurrencies, this temptation does not constitute a viable investment rationale."

Whether it's the variety of data in the options and institutional markets or the views of major financial institutions like Goldman Sachs, the increase in trading activities by professional traders and institutional investors is evident. This shift in trend may also have an impact on the volatility of the Bitcoin market in the long term.