Yes, Bitcoin Options Open Interest is 2.5 times higher this week; Why?

Bitcoin’s price has gained by 7.33% in the last 7 days. With this kind of momentum building up, Open Interest on derivatives exchanges is up too. However, that’s not the only interesting bit. In fact, while aggregate Open Interest on derivatives exchanges is up by 18%, on Huobi, it is up by 250% over the week. 

Open interest in Bitcoin Options || Source: Skew

A series of events over the past three weeks, including the $50 million investment by Square Inc. and the $500 million investment by MicroStrategy, have put Bitcoin front and center for institutional investors. Apart from private fund houses, government pension funds are also getting exposure to cryptocurrencies, with the same contributing to growing investor confidence and interest. 

Total BTC Options Open interest || Source: Skew

Open interest in the BTC Options market is expected to increase further as smart money is concerned about risk exposure. RoI on BTC is higher than any other asset class. In fact, it has beaten gold in 2020 too. However, smart money pours into Options faster than spot exchanges and this is the case with retail traders as well.

Minimizing risk exposure and maximizing returns have been popular strategies this market cycle. The drying up of Bitcoin inflows to spot exchanges and the dropping reserves have further fueled this narrative. 

As a retail trader, following smart money may not always be advisable. However, in a market starved for inflows and the underlying asset, following smart money on derivatives exchanges is a popular choice. Retail traders are on the same page as institutions, and on Huobi, this is reflected in the trading volume.

Trading volume on Huobi Futures || Source: Huobi

Increasing trade volume would mean that the sentiment is bullish. However, the important question is, how long will the bullish sentiment last? To sustain the bullish sentiment, the net outflows have to drop while inflows continue to increase. As of now, on derivatives exchanges, the netflow is positive. However, spot exchanges continue to struggle with heavy outflows. 

Netflow on derivatives exchanges || Source: Cryptoquant

In the case of net outflows, DeFi projects lead the way, with heavy incentives motivating traders to park funds for longer periods. Though spot exchanges offer fewer incentives for parking funds, a move similar to DeFi may help boost the said netflow. 

The present bull run fueled by smart money on derivatives exchanges may be short-lived unless interest and funds increase proportionately on spot exchanges. Until then, trading options will help multiply profits while reducing the underlying risk for retail traders.