Micro-options for bitcoin and ether are a good source of liquidity for the crypto market

Micro-options for bitcoin and ether are a good source of liquidity for the crypto market

Options are a derivative financial instrument that gives market participants the right (but not the obligation) to buy or sell an asset at a certain price at a certain point in time. With the help of put and call options, market participants modify their investment strategies.

Relatively recently, the Chicago Mercantile Exchange (CME) began offering options for bitcoin and ether futures to market participants.

Recall that the prices of bitcoin and ether soared after CME launched trading in futures contracts for cryptocurrencies. Bitcoin futures began trading at the end of 2017, and ether contracts became available in 2021.

However, in the same year 2021, another important event occurred: the so-called “micro-futures” for leading cryptocurrencies were launched, representing classic contracts with a reduced lot. This move has expanded the investment community of the growing digital currency market by reducing the equity requirements of traders.

A fresh CME initiative from March 28 is able to launch another rally of cryptocurrencies, as well as exponentially increase the number of derivative products. ETFs and ETNs with leverage use options to “multiply” the dynamics of underlying assets.

Micro futures options will attract additional liquidity and offer market participants new tools to achieve their investment goals, while simultaneously supporting the prices of bitcoin, ether, as well as more than 18,700 altcoins that focus on the dynamics of leading tokens.

At the end of January, bitcoin and ether found a local bottom

On November 10, 2021, “bearish” reversal patterns formed on the daily charts of bitcoin and ether, marking the beginning of a sell-off to the lows of January 24.

Bitcoin Futures – Weekly Timeframe Bitcoin Futures – weekly timeframe

Charts provided by: CQG

Bitcoin futures fell from a peak of $69,355 to $32,855, losing 52.6%.

Ether futures – weekly Timeframe Ether Futures – weekly timeframe

Over the same period, ether futures dropped 56%, falling from $4,902.75 to $2,158.

A series of rising highs and lows hint at a new rally

On the weekly charts, you can trace a series of growing highs and lows originating at the “day” of January 24. Over the past few years, the cryptocurrency markets have demonstrated very high volatility, when the phases of active growth were replaced by aggressive sales. The current price dynamics may be a harbinger of another jump that will begin in the coming weeks or months.

On April 11, bitcoin futures were worth $42,342, which is almost 30% higher than the lows of January 24, while ether futures were trading almost 50% higher than the recent bottom (at $3,172.50 per token).

“Micro-contracts” offer more flexibility

The lot of CME micro futures for leading cryptocurrencies is 1/10 of a bitcoin or ether token, whereas standard CME contracts include 5 bitcoins and 50 ether tokens, respectively. Micro-contracts increase the volume of liquidity, making futures trading more accessible to market participants. Micro-options work in a similar way, providing additional flexibility and offering expanded opportunities within the framework of trading or investing.

The expected volatility is the main factor determining the exercise prices of options. Traditionally, the high volatility of cryptocurrencies suggests that micro-contract options will be in high demand.

Options as a source of liquidity

High trading volumes and open interest in the micro-options market are transformed into the expansion of the futures markets themselves. Open interest is the total number of long and short positions on a futures contract, and trading volume is the number of contracts that change hands.

Market makers, participants in arbitrage operations and experienced market participants use combinations of options and futures to build risky positions. For a market maker, spreads between the supply and demand of options are a consequence of spreads in the futures market. Arbitrageurs use options to create hedged positions with a fixed profit. Other market participants use combinations of options and futures to make money on spreads and other long or short positions that reflect the direction of the price.

Ultimately, the emergence of micro-options should increase trading volume and open interest, as well as provide an influx of liquidity to the futures markets.

The next stage of the “growing up” of cryptocurrencies

In 2017, CME launched the first cryptocurrency futures contract. And although the exchange is a self-governing organization, it has worked closely with the Commodity Futures Trading Commission.

Exchange-traded funds and bonds that have emerged in recent years (as well as new exchanges such as Coinbase Global (NASDAQ:COIN)) We also worked with the U.S. Securities and Exchange Commission. Leading US regulators have clearly defined the path for digital products.

Micro options for bitcoin and ether futures are another step towards the widespread adoption of digital assets. Not only BTC and ETH have growth potential; there are “rough diamonds” among the 18,700 altcoins, and each new exchange product attracts liquidity and increases the attractiveness of these markets.