CME's launch of options on bitcoin futures next week signals shift in crypto derivatives landscape

Bitcoin traders will soon have more options – options contracts, that is. 

CME Group, the Chicago-based derivatives giant, is set to roll out a new options contract tied to its bitcoin futures contract on January 13.

The launch of the new product follows a similar move by Intercontinental Exchange-backed Bakkt, which began offering trading of its own bitcoin options product in December. Meanwhile, Asian crypto-native exchanges including CoinFLEX and Bitfinex are preparing to offer options.

To be clear, Deribit, a soon-to-be Panama-based derivatives exchange, has been offering options trading for several years, reporting daily volumes close to $300 million in December. 

Elsewhere, brokers and market participants have traded bilaterally by using Telegram or Paradigm, the latter of which is an automated platform for firms to negotiate options trades.

Traders have negotiated over 20,000 bitcoin worth of trades on Deribit using Paradigm since it launched, according to data from the New York-based company.

Still, the entrance of CME signals a new development for the crypto space as the firm is one of the largest players in derivatives and benefits from existing links to the world's largest hedge funds and investors. 

"So that’s a short term advantage for CME," noted Rich Rosenblum, cofounder of crypto trading firm GSR. "Longer term, Bakkt is posturing that they are a more fully integrated crypto platform, not just an institutional exchange. So being more new and separate could prove the better choice longer term."

Furthermore, CME and Bakkt's contracts — unlike Deribit's — will not settle in physical bitcoin, which means investors don't need to take custody. This could be more appealing to traditional firms.

"Exposure to a new asset class without the custody headache, sign up all the old world," one industry insider noted. 

Exchange-listed options, Rosenblum said, will offer similar functionality as traditional assets. CME and Bakkt both will offer financially settled options, which will settle in their respective one-month bitcoin futures contracts.

"It was only a matter of time before options started to account for a big part of crypto," he said. 

Options offer optionality, allowing traders to purchase an asset at a certain price–known as the strike price—at a future date. For instance, if the price of bitcoin is trading at $7,500, a trader could buy a call option to purchase bitcoin at $10,000 a month later. If at that point, bitcoin is trading above $10,000–in the money—then the trader would reap the profits of the spread between the strike price and bitcoin's market price. In this sense, it offers a way to express a view on the market.

Options also allow investors to manage risk. For instance, if a company needs to acquire a certain amount of bitcoin at a future date, they can use options to lock in payout ranges.

"Ultimately, this enables more investment in the space from more sophisticated institutional players," Rosenblum said. 

Options offer investors the ability to buy downside and upside protection. This could be particularly useful for one of the most important corners of the bitcoin market: miners. That said, it's not exactly clear what will happen to bitcoin's price following the so-called halving event, which will cut bitcoin miner rewards in half.

"What is clear is that mining is getting more competitive," Rosenblum said. "Difficulty has tended to go up and to the right."

"So miners need to get more efficient," he added. "To do so, they need to invest more and options are integral to risk management."