Competition for Crypto Options Heats Up

Welcome back to the Data Debrief! This week we’re diving into all things crypto derivatives, with a particular focus on options markets. Crypto derivatives markets have been dominated by native players over the past decade, but now competition is growing. We explore this growing competition and how options on traditional venues might offer broader growth opportunities for altcoins.

Competition for CRYPTO OPTIONS HEATS UP

Crypto options trading has historically been dominated by native exchanges, with Deribit, OKX, and Binance leading the market despite the presence of traditional venues like CME.

The crypto options market is quite top heavy too, with over 56% of activity focused on BTC, and a further 40% on ETH. While some major altcoins have garnered attention in the past, any divergence is usually due to platform specific demand drivers, such as Binance promoting BNB-related incentive programs in the past.

Deribit remains the liquidity hub for BTC and ETH, with daily BTC options trading volume regularly exceeding 20k contracts, or over $2bn notional value.

Options on Deribit are “European style,” meaning the holder can only exercise the option at expiration. Alternatively, options that offer early exercise are referred to as ‘American style.’ The flexibility around expiration means that American options are often more liquid than European.

However, this isn’t currently the case in crypto, where European style supremacy has led to clustering of liquidity around the largest monthly expiration. This is the last Friday of each month on Deribit, and usually, the front month (nearest expiration) sees the most volume.

While things are a little different in traditional options markets, where recent product launches have improved competition, there are also clear winners. Prior to 2024, this was ProShares BTC futures ETF, BITO. The market was lopsided towards BITO, with over 7mn trades since inception. For now, there is no room for options on ETH ETFs, which only launched in April of this year.

Since the advent of spot BTC ETFs that trend has shifted. Now the most popular crypto-related options on Cboe are tied to BlackRock’s IBIT. These options, which only launched in November 2024, have already done over 85% of BITO’s total trades since inception, in a quarter of the time.

Interestingly, the demand for IBIT options hasn’t translated to other spot BTC ETF options, such as Fidelity’s FBTC or Grayscale’s GBTC. These funds have traded far fewer contracts and growth has been relatively flat, while IBIT options have consistently trended higher since inception—with daily trading volume even exceeding 1mn contracts at times this year.

The rapid uptake on IBIT options suggests there is some significant organic demand in traditional markets for crypto-related options.

It’s also encouraging that these options so quickly bucked BITO’s dominance. Open interest for IBIT took just one month of trading to surpass BITO’s three year head start.

The encouraging success of IBIT’s options has attracted more issuers to crypto markets, with demand for ETFs beyond BTC and ETH soaring. While it took nearly a year from approval of spot ETFs for the ETH options to launch, things have been quicker for SOL-related products. REX-Osprey launched the first U.S.-based spot SOL product in June 25, with impressive uptake. Trade volumes have consistently come in between $20mn and $40mn, exceeding $60mn at their peak.

Options on the SOL spot ETF have already gone live, only two months after spot launched, setting a new pace for crypto options launches. This increased pace of acceptance on traditional venues could lead to the growth of options markets beyond the leading assets, as we’ve seen on Deribit. As spot DOGE ETFs are set to launch this week, it’s feasible we see a DOGE ETF Option on the likes of Cboe before we have them on Deribit. While this doesn’t necessarily mean these will attract liquidity immediately, it does create the foundation for growth.

One reason in particular that these ETF options could be more successful promoting a broader range of assets is around liquidity. As noted above the European option structure is typically less liquid than American options. This has previously led to some quirks in crypto markets, as patchy volumes and missing quotes make it harder to measure risk and create stochastic models to measure implied volatility and, therefore, accurately price risk.

We’ll explore how both traditional and crypto markets are pricing risk on options in next week’s debrief, with a focus on arbitrage opportunities, and why Coinbase’s acquisition of Deribit might lead to broader efficiency.