Insight
February 14, 2025
This week, the SEC acknowledged receipt for a proposed change in the ETF market structure that could be significant but hasn’t gotten much attention. While the market remains focused on which digital asset might be next to get an ETF, Nasdaq ISE and NYSE Arca are pushing to increase the position limit on IBIT and GBTC options by 10x, from 25,000 contracts to 250,000 contracts.
The change could have important implications for market structure and financial products. Options on IBIT have been wildly successful, with $2.35 billion in notional daily volume over the past 20 days. This compares to CME-listed options on bitcoin futures, which have averaged $208 million in notional trading volume over the past 20 days. Options on FBTC, ARKB, BITB, and BTC have been much less popular with $44 million, $7 million, $4 million, and $5 million average daily notional trading volume over the past 20 days.
Why have IBIT options been so popular despite their relative newness, especially compared to CME options (IBIT options began trading on November 19th, 2024, while CME options on bitcoin futures began trading on January 13th, 2020)? In our view, the primary reason is collateral management and margin requirements. CME’s cash collateral requirements put it at a distinct disadvantage versus equity-linked options, for which the underlying securities can be posted as collateral. It makes certain options strategies, like covered call overwriting much more capital efficient. CME options traders are likely limited to institutional investors and professional traders, while IBIT options likely include those investor types, plus retail.
Increasing position limits on IBIT options likely increases its lead as the preeminent spot bitcoin ETF and makes structured products more appealing. As an example of this type of product, Calamos recently launched a series of “Protected Bitcoin ETFs” which are designed to provide upside exposure while capping downside risk (note these products reference Cboe bitcoin ETF index options in which IBIT is the biggest component). We could see structured products be an important product development going forward.
What might the impact be on bitcoin's price from an increase in options limits? It primarily depends on how expanding the volatility (vol) market would be used by traders. For vol sellers like call overwriters, increasing the position limits would naturally suppress volatility. For vol buyers, like out-of-the-money call buyers, this would increase volatility. We have noticed, even on big down days, demand for upside call buying by traders. While the data seems to indicate a decline in implied volatility over time, it has been slight and somewhat resistant to pushing to new lows over the past year.
Despite the market volatility that has accompanied the Trump presidency (tariffs, inflation numbers, DeepSeek, international relations), bitcoin implied volatility has surprisingly trended down. This trend differs from risk markets like equities, where the VIX has a premium to its normal levels. This likely has to do with the rangebound trading that bitcoin has been in for the past 2 months rather than something structural with the bitcoin markets. We also see a continued steepening of the term structure after IV compression. This suggests that while traders are less optimistic about short-term price movements amid sideways price action, they continue to anticipate significant price moves further into the future.
One final observation on derivatives markets – the basis on CME-listed futures has compressed to levels that make the basis trade less attractive, which may in turn affect fund flows into the ETFs. Hedge funds employing the basis trade are big drivers of ETF fund flows and with the front month contract (Feb) below 5% gross annualized and the second month (Mar) around 8% gross annualized, this trade is becoming less appealing.
The SEC has until September 3rd, 2025, to make a final decision on the IBIT option position limit change. Although no deadline has been set for the decision on GBTC, we expect it to be around October 15th of this year. While Cboe has yet to file for position increases on FBTC, ARKB, or BITB, we may see that in short order, maybe not for ARKB or BITB given their low volume, but perhaps for FBTC.
According to the website Coin Market Cap, there are now (as of the time of writing) 11.29 million cryptocurrencies in existence. Coinbase’s CEO Brian Armstrong recently wrote that a staggering ~1m tokens a week (emphasis added) were being created. This growth has sparked a shift in mindset and invoked important philosophical questions about the broader industry and technology.
To unpack it all, it's crucial to revisit the foundational features that Bitcoin first pioneered. At its core, Bitcoin enables three key attributes:
While Bitcoin is often lauded as a technical marvel, its true breakthrough was in combining pre-existing technologies—public key cryptography, hash algorithms, proof-of-work, and peer-to-peer networks—into a novel system held together by economic incentives and digital scarcity. Once this Pandora’s box was opened, it could never be closed.
What has ensued since the creation of Bitcoin has been nothing short of a Cambrian explosion of experimentation in technology, economic models, governance structures, capital formation, and incentive design. The sheer breadth of experimentation has fueled advancements in computer science, distributed systems, and finance, all fueled by self-created cryptocurrencies (and venture capital).
Amidst this evolution, some technical innovations have left a lasting mark – Dapp platforms and smart contracts, zero-knowledge proofs and privacy-enhancing technology, automated market maker (AMM) designs, and on-chain collateral management, to name a few. This has enabled lasting innovations such as DeFi and stablecoins. However, a full vision of Web3, a decentralized internet powered by blockchains, has yet to be realized. While it’s noble in its vision, Web3 idealists often overlook the efficiencies of scale from centralization, which provide lower costs and faster execution—factors that matter in competitive markets.
Moreover, attributes like decentralization are difficult to quantify. Sweeping statements are often made like "XYZ is decentralized" when they mean "XYZ is on a blockchain." Even DeFi, one of crypto’s most successful sectors, was initially also called OpenFi—a more accurate name reflecting open-access financial systems.
With millions of tokens flooding the market, crypto remains obsessed with the "next big thing." Participants jump from trend to trend, abandoning one to chase another. Bitcoin isn’t immune to that either. Within just the past 2 years, the community has tinkered with Ordinals, BRC-20s, rare sats, and Runes. Bitcoin “layer 2s” and staking seem to be the current rage, while tether on Lightning is likely to be a highly watched item.
Pulling back to the broad crypto industry, each market cycle brings its own narratives. The current cycle seems to be a mishmash of things—DeFi (again), stablecoins (again), memecoins, AI, ancient alts, LRTs (liquid restaking tokens), RWAs (real-world assets), DePin (decentralized physical infrastructure), rollups & L2s—memecoins seem to be the biggest feature of this cycle if we had to pick one. Last cycle, those themes were social credit/access tokens (BitClout and Friend.tech), crowdfunding (ConstitutionDAO), DeFi summer (liquidity mining, yield farming, vampire attacks, food coins), Play-to-Earn (P2E), Move-to-Earn (M2E), unsound economic models (Terra/LUNA, Olympus DAO), LSDs (liquid staking derivatives), dog memecoins, bridges, alt L1s, NFTs, and the metaverse.
If you don’t recall these themes, or they seem like a blur, that’s the point. The key takeaway isn’t just the endless reshuffling of trends, but the realization that active investing in crypto is a constant search, and few innovations stand the test of time.
When evaluating what has persisted, one pattern emerges: the most successful applications are financial in nature—money/store of value, lending/borrowing, exchanges, derivatives, stablecoins, staking/restaking, oracles (price feeds), and blockchain scaling (alt L1s, L2s).
Why? Because the core features of crypto—trustlessness, permissionlessness, and censorship resistance—are uniquely valuable for money and financial applications. In contrast, for most other applications, blockchain’s features introduce friction and unnecessary costs, making it less practical than traditional, competitive solutions.
Has the industry finally caught up to this idea? Perhaps. Maybe that’s why bitcoin’s dominance continues to rise even as the industry coin count continues to soar. Additionally, much of the industry, especially by coin count, seems to be skipping over any veil of economic or technical innovation and going straight for memecoins presently, a trend that’s unlikely to create enduring value.
The rapid proliferation of tokens and protocols will likely continue, especially with changes about to occur in the regulatory political environment. Only a small fraction will leave a lasting impact. The real question faced by the industry is no longer what can it build with blockchain technology, but what should it build?
Bitcoin’s sideways trading continued again this week, with the price essentially unchanged. There was a bit of volatility with the hotter-than-expected CPI (inflation) numbers on Wednesday, but traders in bitcoin as well as equities and other risk assets, used the opportunity to buy the dip.
With the dynamics in the derivatives markets mentioned above, it appears as though traders are looking for the next catalyst to move bitcoin out of the range. Funding rates on offshore perpetual swaps remained muted as well reflecting a lack of strong directional positioning.
Unfortunately for short-term focused traders, many of the political, legal, and regulatory changes ushered in by the change in administration will take months to take effect. The White House’s Working Group on digital assets isn’t even due to submit its recommendations to the President until July. That doesn’t mean things won’t move forward, however. We have initial drafts on stablecoin legislation (knowing legislation will change many times over before a final bill is signed leaves strong assertions like “Tether must sell their bitcoin” more than a bit premature), change is underway at the SEC and the 60-day stay in the Binance case could be a precursor to settlement (and potentially bodes well for the Coinbase and Ripple cases), and now we have appointees for the CFTC and OCC.
More immediately, however, convenience class creditors in the FTX bankruptcy will begin receiving distributions next week (Feb 18th). MicroStrategy is also back in the market after a brief hiatus. GameStop, with $4.6B cash on the balance sheet ($464 million in debt) is reported to be mulling over a bitcoin investment. While some big picture changes are down the road, there are still some important short-term catalysts investors should focus on.
Investing:
US Endowments Join Crypto Rush by Building Bitcoin Portfolios - FT
Abu Dhabi Sovereign Wealth Fund Bought $437 Million of BlackRock's Spot Bitcoin ETF - The Block
GameStop is Considering Investing in Bitcoin and Other Cryptocurrencies, Sources Say - CNBC
Early Crypto Traders Had Speedy Profit on Trump Coin as Others Suffered Losses - NYT
Trump's World Liberty Financial Unveils Plans to Invest in BTC, ETH, and Others - X
Regulation and Taxation:
Binance, SEC and CZ Move to Halt Case and Find an Early Resolution - CoinDesk
Many Memecoins Likely Fall Outside SEC Jurisdiction, Says Commissioner Hester Peirce - The Block
Trump Has Made His Major Decisions on His U.S. Crypto Regulation Team, Now Also OCC - CoinDesk
2024 Pig Butchering Crypto Scam Revenue Grows 40% YoY as Industry Increases Sophistication - Chainalysis
Companies:
FTX Announces Initial Distribution Date of February 18, 2025 for Convenience Class Creditors - FTX
Feb 28 - CME expiry
Mar 4 - FTX creditor payment deadline
Mar 12 - CPI release
Mar 19 - FOMC interest rate decision
Jul 2 - Final SEC deadline for decision on GDLC ETF conversion
Jul 22 - EO Working Group report deadline
This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report. The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accessing this report, the recipient acknowledges its understanding and acceptance of the foregoing terms.
