Bitcoin's halving appeared to have fueled a surge in a trading product at one of Wall Street's most important financial institutions.
Trading volumes and open interest in CME Group's bitcoin options product has surged since the event last Monday, which saw the number of bitcoins produced with each transaction block falling from 12.5 BTC to 6.25 BTC (effectively cutting new coin issuance in half). CME, which is among the largest exchange groups in the world, launched its bitcoin options product at the beginning of 2020.
As noted in a recent blog by CME, this year's halving was unique relative to previous ones given the size of the derivatives market and the availability of options and futures on regulated U.S. exchanges. Options, specifically, can be used by miners to hedge their exposure in spot bitcoin. Miners can also use options to earn additional income.
"A robust options market could also allow for additional income to be earned by miners or enhance long bitcoin positions which would further cushion the impact of the upcoming halving," wrote Payal Lakhani, the firm's director of equity research and product development. "With the emergence of a healthy options market, investors can take price signals and consensus estimates about market expectations."
Indeed, up until the halving, trading volumes and open interest for CME's bitcoin options product were de minimis. Open interest — the total number of outstanding derivatives contracts — soared from $35 million on May 11 to $142 million on May 14, as indicated by Skew. Meanwhile, the number of contracts traded hit a record of 878 contracts on May 13. In dollar terms, that represents $40 million worth of trading volumes, per Skew.
To be sure, despite the growth, the size of CME's market represents a fraction of rival Deribit, which traded $116 million on May 13.
Traders speculate that the new action in CME's bitcoin options is being driven by both miners and new institutional entrants to the market. CME revealed exclusively to The Block that 256 new accounts have begun trading the product since the start of May, with a cumulative 2,129 accounts trading the product.
"As you'll note, almost as many new accounts were added in the first two weeks of May alone as in all of April," a spokesperson said in an email.
Derivatives guru and Skew founder Emmanuel Goh said that rising institutional adoption of the product is driving growth.
Richard Rosenblum of GSR Trading said that the halving, juxtaposed with the current pandemic and macro backdrop, could have brought in new professional investors and traders who are more likely to trade futures on CME than spot bitcoin.
"The timing of the halving coinciding with the pandemic undoubtedly helped investors like [Paul Tudor Jones] come in, and others will follow," Rosenblum said. "Institutions following PTJ are more likely to trade on CME."
As for CME's future plans, despite new derivatives launching at rival venues, the firm is not preparing to launch new products tied to the cryptocurrency market at this time. As a spokesperson for the firm noted:
"At CME Group, our innovation process starts with our clients – listening to their feedback so we can create products and solutions to help them manage their risk. While we are continually talking to our clients about ways to meet their needs, we have no plans to launch additional cryptocurrency products at this time."
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