How the launch of spot ETFs could curb Bitcoin’s volatility

One of the key factors in Bitcoin’s success is the emergence of new trading infrastructure and investment methods, opening it up to new investors. This trend is accelerating with the recent launch of spot BTC ETFs.

Beyond liquidity providers and trading platforms, we don’t yet understand much about how these massive changes will alter Bitcoin market structure.

As market structures mature, we can expect inherent volatility to decrease. Here, we explore how several important shifts associated with the introduction of spot ETFs may facilitate this change.

Correction of ETFs as market price reference

The recent launch of the ETF has apparently led to a significant increase in the underlying spot Bitcoin trading volume. Notably, a disproportionate share of this volume increase occurred primarily between 3pm and 4pm Eastern Time, or close to the ETF pricing time.

The chart below shows the percentage of daily Bitcoin trading volume starting from 3:00 pm to 3:30 pm ET for major trading pairs. Trading activity during these two time periods, which usually account for less than 5% of total trading volume, now accounts for 10-13%.

By providing a transparent and consistent reference point that is increasingly recognized by market participants, ETF fixings allow investors to aggregate large trades at the same time, reducing their market impact and overall market volatility.

A new options market around ETFs?

The three exchanges that currently list spot Bitcoin ETFs have requested permission from the U.S. Securities and Exchange Commission (SEC) to list options on these ETFs. These applications may take 1 to 8 months to be evaluated by the SEC, and there are some complexities related to their clearing and settlement processes.

If this new class of options is approved, the Bitcoin options market could receive a significant boost. The Bitcoin options market is currently divided between investors who trade on offshore exchanges that are inaccessible to Americans or on platforms that are only used by large institutions. Allowing options based on a spot Bitcoin ETF could significantly expand the options market beyond these two markets.

Overall, the importance of the Bitcoin options market should continue to increase in 2024, even after last year's huge growth. A more mature options market can reduce volatility because it allows investors to express a wider range of investment strategies and makes the most liquid ETFs more liquid. It also expands the importance of events such as option expiration and trader positioning as drivers of price action.

ETFs bring Bitcoin revolution

It’s exciting to see the ETF revolution now having a positive impact on the Bitcoin market. The launch of spot Bitcoin ETFs has arrived and will likely continue to increase investor participation, perhaps similar to the launch of gold ETFs in the early 2000s.

In just over two weeks since its launch, the spot Bitcoin ETF has seen daily trading volume of over $1.5 billion. To put this in context, this volume is roughly equivalent to 20% of Bitcoin’s volume on a good day in the spot market.

As innovation in cryptocurrency ETFs continues, we expect ETF-related trading activity to continue, which should dampen Bitcoin volatility and help this emerging asset class mature.