Airdrop Army

With the SEC giving BlackRock the green light to trade options on its iShares Bitcoin Trust ETF (IBIT), a new level of complexity enters the crypto sphere. Analysts at CryptoQuant are raising red flags about how this might impact physical Bitcoin demand. Institutional players could now chase “paper” exposure through options, bypassing the need to actually hold any BTC.

The buzz is around whether this could flood the market with more “paper” Bitcoin. After all, derivatives like options allow institutions to go long or short without having to buy or sell the real thing. CryptoQuant analysts highlighted this as a potential game-changer, warning that “the paper supply of bitcoin will increase.”

Surging “Paper” Bitcoin Supply Raises Eyebrows

It’s not like this is a brand-new issue. Back in the 2022 bear market, the “paper” Bitcoin supply soared, with open interest jumping from 279,000 BTC to 549,000 BTC. Traders preferred taking positions in futures rather than dealing directly with the spot market, especially when prices were tanking. Now, with options on IBIT in play, the same pattern could emerge again.

But derivatives trader Gordon Grant pointed out that while paper assets may dominate the volume, there’s still a need for the real deal underneath. He drew parallels to the gold market, saying that even though paper gold trades more, physical demand still props up the whole thing.

Bitcoin Struggles as Collateral in Traditional Finance

However, Grant also mentioned that Bitcoin doesn’t fit neatly into the traditional finance system yet. Unlike gold or other assets, Bitcoin isn’t widely accepted as collateral in North American markets, making it harder for traders to leverage directly with BTC. So, most players will probably stick to U.S. dollars when dealing with IBIT options.

Grant thinks this could have a big effect on Bitcoin’s market share of derivatives. He noted that as Bitcoin integrates more into traditional finance, the market share of Bitcoin futures and options is likely to increase. So, the size of the pie gets bigger and the slice of derivatives gets even bigger.

But there’s also a cautionary note. Grant hinted at the risk of a volatility squeeze in the Bitcoin options market. If retail traders flood the market, we could see wild swings like we did with GameStop and Ethereum back in the day.