BlackRock’s Bitcoin ETF options are expected to drive institutional demand, potentially triggering a GameStop-like gamma squeeze rally in BTC. However, long-term institutional involvement is likely to dampen Bitcoin’s volatility, suggesting a future of greater market stability.
The U.S. Securities and Exchange Commission’s (SEC) recent approval of physically settled options tied to BlackRock’s spot Bitcoin ETF, the iShares Bitcoin Trust (IBIT), has stirred discussions of a possible “gamma squeeze” rally similar to GameStop’s (GME) historic price surge. Experts predict that these options could dramatically increase upside volatility in Bitcoin (BTC), setting the stage for significant price swings once the options gain full regulatory approval.
Potential for a Gamma Squeeze
Bitwise Asset Management predicts that the introduction of IBIT options could trigger a gamma squeeze—a rapid price rally driven by options market dynamics. To understand this, it’s important to grasp how options function. In simple terms, a call option allows investors to buy an asset at a predetermined price, betting on a market upswing, while a put option allows them to sell, betting on a decline. When large amounts of call options are bought, market makers, who must maintain neutral exposure, end up holding short positions. To hedge against these, they purchase the underlying asset as prices rise, further pushing the asset’s price up.
This cycle, known as a gamma squeeze, creates upward pressure on the price, similar to what occurred with GameStop in 2021. With IBIT options, market makers will likely need to buy more Bitcoin as prices rise, accelerating the price rally. Jeff Park, head of alpha strategies at Bitwise, explained on X that Bitcoin options are prone to negative vanna, meaning that as prices rise, so does volatility. This dynamic could cause a chain reaction, where rising prices lead to more buying, propelling Bitcoin higher.
Institutional Involvement and Long-Term Outlook
The launch of IBIT options is expected to attract institutional investors, creating demand for call options and amplifying the likelihood of a gamma squeeze. Importantly, IBIT options could eliminate a key risk for institutions—jump-to-default (JTD) risk, where an asset plummets suddenly before the market can react. Park believes that institutions will likely favor long-term, out-of-the-money (OTM) call options, which allow for significant upside without requiring fully collateralized positions.
While Bitwise foresees potential explosive price movements in the short term, others take a more cautious view. Greg Magadini, director of derivatives at Amberdata, agrees that a gamma squeeze is possible, particularly if a favorable market environment emerges, such as Republican candidate Donald Trump winning the U.S. election and further Federal Reserve rate cuts. However, he argues that institutional flows will eventually temper Bitcoin’s volatility. He notes that institutions typically sell appreciating assets through quarterly rebalancing, which could help manage any dramatic price spikes.
Long-Term Impact on Volatility
Magadini highlights the historical decline in Bitcoin’s volatility since the introduction of futures trading in 2017 by the Chicago Mercantile Exchange (CME). Institutional participation, especially through ETF options, tends to reduce upside implied volatility by employing strategies like covered calls, where investors sell higher strike options to generate income while holding the underlying asset. This strategy, commonly used in traditional markets like gold, could lower volatility in Bitcoin over time.
Magadini suggests that as institutional ownership of Bitcoin grows, their trading behavior will exert a stabilizing influence on the market, continuing the trend of reduced volatility observed in recent years. He emphasized that institutional involvement is a double-edged sword: while it may trigger short-term spikes, in the long run, it leads to a more stable and mature market.
Disclosure
This article is for informational purposes only and does not constitute financial advice. Always conduct thorough research and consult with a financial professional before making any investment decisions, especially in highly volatile markets like cryptocurrency.
