Bitcoin Spot ETF: The green light for options is not for now

January 10, 2024, is a memorable day for crypto. This date marks the approval by the Securities and Exchange Commission (SEC) for the creation of a Bitcoin Spot ETF. After months of anticipation, the American financial regulator will finally give the green light to Bitcoin Spot ETFs. This decision, eagerly awaited by industry players, has confirmed the legitimacy of bitcoin (BTC) as a financial asset. The significance of this regulatory approval could have been further reinforced if it had been followed by a green light for options on Spot Bitcoin ETFs. For now, regulators are hesitant to take the plunge. In this article, we explain why hesitations on this matter may still last for a while.

What is an Option on a Spot Bitcoin ETF?

The crypto market, especially that of bitcoin (BTC), has experienced explosive growth in recent months. Consequently, the flagship crypto’s performance has drawn the attention of an increasing number of traditional investors. These investors are looking to capitalize on this emerging trend. In this context, Spot Bitcoin ETFs have positioned themselves as financial levers in crypto investments.

While Spot Bitcoin ETFs have been recently approved, options on said ETFs have emerged as strategic financial instruments. Particularly in terms of portfolio diversification and risk management. But what exactly does an option on a Spot Bitcoin ETF represent and why is it important?

An option on a Spot Bitcoin ETF is essentially a contract. A unique contract, as it grants the buyer a right without obligation. The right to buy or sell a Spot Bitcoin ETF at a specified price and date. It is a form of investment that presents several key advantages, offering investors increased flexibility and diversification, allowing them to be exposed to bitcoin (BTC) without directly owning it.

Options on Spot Bitcoin ETFs have a distinctive feature. Depending on whether they are call or put options, they allow investors either to speculate on the rise in bitcoin (BTC) price, in the former case. Or, in the latter case, to hedge against a potential decline in the valuation of the flagship crypto.

Thus, options on Spot Bitcoin ETFs could be particularly useful for crypto investors, who are exposed to significant price volatility. This is where their interest lies, for options on Bitcoin Spot ETFs offer institutional and individual investors an accessible and regulated means of exposure to bitcoin (BTC). These options could in fact help increase BTC market liquidity, potentially reducing its volatility while paving the way for its broader institutional adoption. But then, why, despite its potential, is there hesitation surrounding the green light for this financial instrument?

Still Stories of Regulatory Concerns

If options on Spot Bitcoin ETFs have not yet emerged, it’s due to concerns. Jurisdictional and supervisory concerns that the Commodity Futures Trading Commission (CFTC), expected on the matter, has not yet resolved. And the resolution may not be imminent, according to some sources. They estimate that this challenge could delay regulatory approval for options on Spot Bitcoin ETFs by 2 to 10 months. At least that’s the opinion of Martin Leinweber, digital asset product strategist at Market Vector Indexes, a provider of benchmark indices for VanEck’s Spot Bitcoin ETF, available at VanEck.

For the time being, the lack of options on Spot Bitcoin ETFs poses a problem for significant investors, those planning to inject up to $100 billion into ETFs, who might face risk management challenges. Yesha Yadav, a law professor at Vanderbilt University in Tennessee, USA, believes that this could discourage some investors from participating in the dynamics.

Moreover, this delay hinders the crypto sector’s ambition to introduce more innovative products to the market. John Roglieri, head of capital markets at FalconX, an ETF transactions facilitator, also has a complementary view on the issue. He notes that while markets are impatient for these advances, it’s because regulators act as influencing or even braking the pace of expected progress.

The Big Silence of Regulators

Thus far, neither the SEC nor the CFTC have particularly expressed themselves about a possible approval of options on Spot Bitcoin ETFs. When asked about the issue, neither of the regulators wished to comment.

Nevertheless, Nasdaq, CBOE, and NYSE Arca, the exchanges listing Spot Bitcoin ETFs, requested SEC approval in January to launch options. This is according to the notices published on their websites. The CBOE has declared that it plans to list the options this year. According to a second source, exchange executives are expected to soon meet with CFTC representatives to discuss the matter. 

But for some analysts, too much shouldn’t be expected from this meeting. Adam Sze, head of digital asset products at Global X, thinks that a delay in the approval of options would not be surprising. Especially as it took the SEC 10 years to approve Spot Bitcoin ETFs. “A few more months for the approval of exchange-listed options are probably not so long in the grand scheme of things,” he quips.  

Note that the double ETF-Options approval is rare, but not without precedent. For example, the SPDR Gold Shares ETF, linked to a physical commodity, is one. It took the CFTC more than three years to approve its options. Conversely, regulators have never approved the 2010 request to launch options on platinum and palladium ETFs. To be continued…