This article was written exclusively for Investing.com
- Bitcoin and Ethereum bottomed in late January
- Higher lows and higher highs suggest another rally is underway
- Micro put and call options offer more flexibility
- Options increase the liquidity of futures
- Another step in the maturing of the asset class
Options are short-term derivatives that give market participants the right, but not the obligation, to buy or sell an asset at a specific price for a specific period of time. Put and call options are tools that traders, hedgers, and many other market participants use to improve their strategies.
Recently, the Chicago Mercantile Exchange began offering put and call options and futures to market participants.
Remember and started up when the CME introduced futures contracts on the cryptocurrencies. Bitcoin futures started trading in late 2017; Ethereum futures became available in 2021. Also in 2021, micro futures on the leading cryptos enlarged the addressable market for the burgeoning asset class by making it cheaper for traders to participate.
The CME’s current move, launched on March 28, could give a renewed boost to digital tokens and exponentially increase the number of derivative products available for trading these assets. Leveraged ETF and ETN products use options to accelerate price movements up and down.
Just like Bitcoin, Ethereum, and many of the other 18,700+ cryptos, options on the micro futures will improve liquidity and give market participants more tools to help them achieve their investment goals.
Bitcoin and Ethereum bottomed in late January
After inserting key bearish reversal trading patterns on the daily charts on November 10, 2021, Bitcoin and Ethereum fell to lows on January 24.
Source, all graphics: CQG
As the chart above shows, nearby bitcoin futures fell from $69,355 on Nov. 10 to $32,855 on Jan. 24, down 52.6%.
During the same period, nearby Ethereum futures fell from $4,902.75 to $2,158, a 56% correction.
Higher lows and higher highs suggest another rally is underway
The weekly charts show that the top two cryptocurrencies have been making higher lows and higher highs since Jan. 24. Your highly volatile markets have gone from explosive to implosive moves in recent years. The price action since late January is a sign that the cryptos could set the stage for another price explosion in the coming weeks or months.
Bitcoin futures traded at the $42,342 level on April 11, almost 30% up from the January 24 low. Ethereum futures are up nearly 50% from the January bottom at $3,172.50 at the time of publication.
Micro put and call options offer more flexibility
The CME micro futures contracts on the leading cryptocurrencies are 1/10 the size of an ether and 1/10 the size of a bitcoin.
The standard CME bitcoin contract contains five bitcoins, and the Ethereum contract consists of fifty ether tokens. The micro-contracts increase overall market liquidity, making trading and investing in futures more accessible to a larger number of participants. Put and call options on the micros improve liquidity by providing additional flexibility and more trading or investing options.
Implied volatility is the primary determinant of put and call option prices. The high level of historical volatility in cryptocurrencies suggests that options contracts on the smaller micro-contracts should attract a lot of interest as well as trading activity.
Options increase the liquidity of futures
Higher volume and open interest rate levels in the micro options lead to more volume in the futures markets. Open interest is the total number of long and short positions in a futures contract. Volume is the number of contracts that change hands between buyers and sellers.
Market makers, arbitrageurs and experienced market participants use combinations of options and futures to structure risk positions. For a market maker, the bid-ask spreads for the options are a function of the bid-ask spreads in the futures market. Arbitrageurs use options to create hedged positions with secured profits. Other market participants use a combination of options and futures to create spreads and other long or short positions that represent an estimate of price and volatility direction.
Conclusion: The introduction of options on micro contracts should increase volume, open interest and liquidity in the futures arena for micro and larger standard contracts.
Another step in the maturing of the asset class
As mentioned above, the CME launched its first cryptocurrency futures contract on Bitcoin in 2017. Although the exchange is an SRO, or self-regulated organization, it worked closely with the Commodity Futures Trading Commission to launch futures contracts on the leader of the burgeoning crypto asset class.
ETF and ETN products that have followed in recent years and new exchanges such as Coinbase Global (NASDAQ:) have partnered with the US Securities and Exchange Commission. Top US regulators have clearly charted a path for cryptocurrency products.
Micro options on Bitcoin and Ethereum futures are another step towards mainstream acceptance for the digital asset class. Among the 18,700+ tokens floating around in cyberspace, there is significant growth potential for Bitcoin and Ethereum and beyond. Every new successful product increases liquidity and acceptance.
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