Hi readers,
Welcome to our institutional newsletter, Crypto Long Short. This week:
- Gregory Mall on how ETFs are transferring more and more of Bitcoin volatility to the U.S. stock options market
- Headlines Institutions Should Watch By Francisco Rodrigues
- Midcap stocks show surprising strength on charts this week
Thank you for joining us!
-Alexandra Levis
Expert Insights
When ETF Options Started to Boost Bitcoin
-Gregory Mall, Chief Investment Officer, Lionsoul Global
The launch of the U.S. Spot Bitcoin ETF marks a structural turning point. The iShares Bitcoin Trust ETF (IBIT) has quickly become one of the fastest-growing ETFs in history, attracting tens of billions of dollars into this regulated vehicle. Less discussed but no less important is what happened next: the rapid expansion of IBIT options.
Over the past year, open interest in IBIT options has climbed into the multi-billion dollar range. Across select high-volume trades, activity is approaching historic levels on Deribit, a cryptocurrency futures and options exchange. A significant portion of Bitcoin’s convexity now resides in the U.S. equity options market rather than offshore cryptocurrency venues.
This shift is important because it changes how volatility spreads.
From offshore leverage to onshore gamma
For most of its history, Bitcoin Volatility is driven by offshore perpetual futures. Funding imbalances, increased leverage and liquidation cascades affected price movements.
ETF options introduce a different mechanism.
When an investor buys an IBIT call or put, the trader typically sells the option and hedges the delta risk. If a trader is short gamma (which is common when investors are net long options), they must buy when the price rises and sell when the price falls. These hedging flows are procyclical in nature and can amplify underlying moves.
Since IBIT holds physical Bitcoin, hedging is not limited to wrappers. Arbitrage, creation, and redemption flows move ETF positions into the underlying market. Bitcoin increasingly participates in the same positioning mechanisms that influence stock indices.
The structure of the ETF options market shows that investors generally hold net long options, suggesting that traders often store short gamma during periods of increased demand. This dynamic may have intensified during February, when volatility was subdued and local crypto players accumulated downside puts. In the context of low volatility, continued options buying creates short convexity among market makers in both ETFs and offshore venues. When spot breaks out, hedging flows can reinforce the feedback loop. In the chart below, we show changes in IBIT options volume and BTC USD hourly realized volatility. We can see this relationship strengthening over the past few weeks.
Figure 1 shows the co-movement between IBIT options trading volume and BTC USD hourly realized volatility, indicating that their relationship has strengthened in recent weeks. To formally assess this relationship, we regress Bitcoin realized volatility onto lagged IBIT options trading volume while controlling for BTC funding rates, stock returns (NASDAQ Composite Index), implied volatility (CBOE Volatility Index, or VIX), short-term interest rate changes, and USD movements. The results show that IBIT options trading activity is significantly correlated with BTC volatility, even when taking into account broader macroeconomic conditions.
Figure 1: IBIT options trading volume and changes in BTC USD hourly realized volatility
Table 1: The impact of OLS regression IBIT option trading volume on BTC volatility
Table 2: BTC volatility distribution before and after IBIT options
We split the data into data before and after IBIT options started trading. For each hour of the day (UTC), we measure how much the Bitcoin price moved during that hour. We then convert this into a fraction of the day’s total volatility, so each column adds up to 100%. The highlighted range (14:00-16:00 UTC) coincides with peak US trading activity, especially the opening of US cash equities. Thereafter, IBIT options volatility became more concentrated during the U.S. session, suggesting that more price discovery and hedging flows occur when U.S. markets are most active.
February as shown in the picture
The sell-off in early February is a useful example. Bitcoin fell sharply in one of the most extreme cross-asset deleveraging events in recent years. However, IBIT records net creation rather than redemptions, which refutes the retail panic.
In a thoughtful Substack post, Jeff Park said the catalyst was cross-asset positioning among some large multi-strategy funds rather than crypto-specific pressures. The correlation between Bitcoin and high-beta software stocks has tightened significantly, suggesting that multi-asset portfolios are being indiscriminately de-risked.
At the same time, the CME Bitcoin basis widened sharply. The basis has recently risen from about 3% to nearly 9%. This move is consistent with multi-strategy funds’ practice of closing delta-neutral basis trades by selling spot or ETFs and buying futures within total exposure limits.
As prices decline in this environment, existing short-term gamma positions may have amplified the downside through mechanical delta hedging. Traders’ short convexity must turn to weakness. The sharp rebound after Friday the 6th is consistent with a rebalancing of hedges once severe stress subsides.
This incident illustrates a broader point. Bitcoin now participates in the same balance sheet and derivatives mechanisms that govern stocks and other risky assets.
Digital gold or leveraged Nasdaq?
This evolution complicates the “digital gold” narrative. Bitcoin’s correlation with gold has historically been unstable, often approaching zero over shorter time periods. Robert Michnick, head of digital assets at BlackRock, believes that the large number of speculative positions may cause Bitcoin to perform more like a leveraged proxy for the Nasdaq rather than a macro hedge. This observation is directionally correct. In Figure 3, we show that the BTC to Nasdaq correlation during US trading sessions has roughly doubled since the launch of IBIT options. However, it’s not just speculative longs that are increasingly important. Delta neutral strategies and derivatives positioning within traditional markets now contribute to volatility feedback loops.
Figure 2: Pre- and post-correlation between Bitcoin and Nasdaq IBIT options
Bitcoin originated outside the financial system. The success of IBIT and IBIT options shows that it is now embedded. This does not invalidate the structural case for digital scarcity for long-term allocators. What this does mean is that short-term price movements are increasingly influenced by positions, hedging and cross-asset flows.
Bitcoin is no longer traded outside the system. It trades in it.
The information contained herein is for informational and educational purposes only and should not be construed as investment, legal or tax advice. Nothing contained in this document constitutes an offer to sell or a solicitation of an offer to buy any securities, investment products or advisory services.
Lionsoul Global Advisors LLC is registered with the Texas Securities Commission (CRD No. 324883). Advisory services provided by Lionsoul Global Advisors are available only to non-U.S. investors who meet applicable qualifications, accreditation and qualifying standards under relevant laws and regulations.
This week’s top stories
– Francisco Rodriguez
Trump’s Mar-a-Lago cryptocurrency summit would have been unthinkable just a few years ago. Now, not only have we achieved that, but the first-ever volume of crypto-related ETFs hit $17 billion or more in a week.
- Goldman Sachs, Franklin Templeton, and Nicki Minaj: Inside Trump’s Surreal Mar-a-Lago Crypto Summit: Mar-a-Lago’s World Free Finance Forum includes figures from traditional finance, cryptocurrency, and real estate in an intimate setting, with panel discussions touching on the future of cryptocurrencies and tokenized real estate.
- To Freeze or Not to Freeze: Satoshi Nakamoto and the $440 Billion Bitcoin Threatened by Quantum Computing: Quantum computing is slowly getting closer to reality, and in the meantime, nearly 7 million Bitcoins may be at risk. This includes Satoshi Nakamoto’s estimated 1 million Bitcoins.
- ProShares’ stablecoin-ready ETF hits $17 billion in first-day trading volume, sparking speculation about Circle: ProShares’ IQMM money market ETF, designed to comply with U.S. stablecoin reserve requirements under the GENIUS Act, hit $17 billion in first-day trading volume. This has sparked speculation that stablecoin issuers may be moving funds.
- The Bitcoin balance on Binance hit its highest level since November 2024, which means: The Bitcoin held by users in Binance-linked wallets reached the highest level since the end of 2024, which may have a negative impact on the already depressed market.
- Specialized AI can detect 92% of real-world DeFi vulnerabilities: Specialized AI can detect 92% of vulnerabilities in 90 exploited decentralized finance (DeFi) contracts, exacerbating concerns about the capabilities of offensive AI.
Chart of the week
Large-cap stocks lag Bitcoin, mid-cap stocks show surprising strength
While Bitcoin is down 27.7% year-to-date, and large-cap indices such as the CD5 and CD20 have underperformed (down 30% and 32% respectively), the CD80 has shown resilience with a smaller decline of only 20.91%. This represents a relative outperformance of Bitcoin by 7%, a reversal of the classic “risk-off” dynamic where smaller assets collapse more than leading assets. This strength suggests that mid-cap stocks have entered a phase of “seller fatigue,” in which heavy holdings by idiosyncratic performers like Hyperliquid (HYPE) and Canton Coin (CC) decouple from broader institutional selling among large-cap stocks.
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