Tomorrow, on the last Friday of the month, over 114,000 Bitcoin options contracts with a notional value of over $1 billion will expire.

The event has been noted as the largest ever expiration of crypto options contracts and according to cryptocurrency data platform Skew, almost 70% of the contracts set to expire are exchanged on Deribit – a first mover in this market.

Luuk Strijers, Chief Commercial Officer at Deribit, recently shared his thoughts with Copper on the significance of the forthcoming event, “Looking at Max Pain, at these BTC price levels, market makers are happy, but the traders betting on a directional move, less so.”

“Historically, Bitcoin’s volatility would suggest anything is possible. However, at the moment price has been fairly steady, and thus there hasn’t been a huge amount of trading around the expiry. Chances of volatility surges are however small as the number of ITM options is limited at these price levels. Still, it’s an exciting week as March options and futures have been launched today, as well as August options. This mirrors traditional markets, where June, September, and December are key moments, particularly when double/triple witching is taken into account.”

ETH options OI climbs

Despite having only been launched over a year ago at Deribit, Ether (ETH) options have become a major growth area in the altcoin sector, surging by 315% over the past two months. This week, 309,000 Ethereum options contracts will expire on Deribit.

Strijers commented: “We see increased interest in ETH options due to price performance since mid-March, new firms entering the options space and intensified sales efforts by our partners. Open interest (OI) is at an all time high at around $170m or ~720k contracts, out of which over 300k or 43% will expire on 26 June 2020.

“We also see an increase in OTC interest resulting in dealers hedging on Deribit, possibly related to a shift in investor interest into ETH post halving and with the upcoming ETH 2.0 launch (Proof-of-work to proof-of-stake change). Investors seem to appreciate the yield potential 2.0 might offer which could be one of the reasons for the price increase since March. Investors expect that staked ETH will diminish overall supply in the market and driving up the price.

“Finally, options yield plays like selling calls and puts are also getting more popular, driving ETH OI and volumes growth as an alternative to the services offered by the borrowing and lending platforms.”

An institutional playing field

Dmitry Tokarev, CEO at Copper pointed to crypto derivative markets being largely unregulated, meaning many market participants have historically avoided diving in.

“While this may not pose an issue for some sophisticated retail investors with an appetite for risk, high counterparty risk has created a barrier to entry for larger, institutional players. Derivatives markets are also more likely to suffer from market inefficiencies caused by the slow collateral transfer. But recently, a number of crypto exchanges are proactively concentrating their efforts on mitigating counterparty risk and reducing exchange deposit and settlement times for cryptoassets.”

Last month, Deribit became the first exchange to fully integrate ClearLoop technology into its infrastructure, enabling users to trade on the exchange without having to transfer cryptoassets out of their own custody accounts. Deribit yesterday also announced its partnership with MARKTS, the crypto order and execution management system (OEMS) to offer digital asset options contracts to the institutional traders.

When asked about the principal factors contributing to Deribit’s unrivalled dominance in the Bitcoin options space, Strijers explained that in addition to offering features that other exchanges don’t – such as portfolio margining – a core element of its success lies in ensuring its options product is underpinned by seamless technology. He said: “With each new innovation and product offering, the crypto derivatives sector accelerates its progress towards becoming more vibrant, transparent and reflective of traditional markets – and thereby more appealing to institutional traders.”

Strijers also noted that although the digital asset arena is rapidly maturing, crypto is still a long way off from the mature asset it strives to be. “Currently, the entire cryptocurrency market cap remains under $300 billion. Compared to gold at $9 trillion or the global stock market at approximately $100 trillion, the digital asset sector is still very much in its nascent stage. However, the rapidly increasing sophistication of options markets has the potential to pave the way for a new wave of institutional players, which could dramatically improve liquidity over time.”

Commenting on the industry’s quiet yet notable transition into maturity, Dmitry said, “I really believe that now, one doesn’t need to scratch too far beneath the surface to see that crypto markets aren’t all that dissimilar to other asset classes.”