In brief
- Lots of Bitcoin and Ethereum options contracts expire on Friday.
- It could cause volatility, say some experts.
- Equally, nothing could happen. In options contracts, traders are not obliged to buy the asset once the contract expires.
Almost a billion dollars worth of Bitcoin options contracts, a little under half in existence, are set to expire on Friday, per data from Skew analytics. And Ethereum isn’t far behind. About $450 million worth of ETH options contracts expire on the same day.
This could potentially introduce a whole lot of crypto back into the market as traders look to dump or HODL. Here’s what to expect.
What is an options contract?
First things first: What are we talking about?
An options contract lets people buy Bitcoin in the future at a price agreed to beforehand. So, if you entered into an options contract when Bitcoin was worth about $4,000 following the mid-March crash to receive your Bitcoin at that very price come the final Friday of September, that would have been a smart decision (or lucky bet), as Bitcoin has more than doubled in price.
This is also the premise of a Bitcoin futures contract. But where the two differ is that a Bitcoin futures contract creates a contractual obligation to buy that Bitcoin upon the contract’s expiry. With options, traders are not contractually obliged to buy up the Bitcoin but simply have the option to do so.
Back to business
Bitcoin options contracts are big business. On Derebit, the largest platform for options contracts by volume, traders exchange about $57 million worth of options contracts each day. And as of yesterday, there are about $2 billion worth of Bitcoin options contracts yet to expire. That means that about half will expire come Friday. For Ethereum, it’s a similar picture.
So, what will happen? According to a research report from Coin Metrics, for ETH, “this event will likely add additional volatility to price action throughout the week, as traders look to hedge exposure on these positions, work out of them, or possibly take action in the spot market in anticipation.”
For Bitcoin, much the same, Charles Bovaird, a researcher at crypto research firm Quantum Economics, told Decrypt. “As these contracts approach their expiration date, volatility could spike as investors opt to buy, sell or let their contracts expire.”
Dan Gunsberg, CEO and cofounder of crypto trading platform Hxro, said that a good chunk of the options contracts are between $11,000 and $12,000—far above Bitcoin’s current price of $10,310.
Gunsberg told Decrypt: “The market is effectively giving you 20:1 odds right now that the price will trade at or above $11,000 by the 25th of September.” Hitting $11,000 would be no great explosion; Bitcoin’s price was just above $11,000 on Saturday. But any higher than usual “could set off some fireworks.” Still, he said, “This is crypto, so you never know.”
Bovaird added: “If a large number of contract holders use this ability to purchase bitcoin before the contracts expire, that would place upward pressure on the cryptocurrency’s price. Likewise, if contract holders used their options to sell, it would place downward pressure on bitcoin prices,” he said.
“However, it could also have very little impact at all,” he said. “If the options contracts expire without being exercised (used), then they won’t place upward or downward price pressure on bitcoin.”