U.S. regulators are keeping crypto players on the edge of their seats as they weigh whether to give their blessing to bitcoin exchange-traded funds (ETFs).
Derivatives traders are already piling in, though, betting the Securities and Exchange Commission will give the green light to several ETF hopefuls this week and electrify the market.
Open interest, the amount invested in bitcoin futures, has steadily increased since October and leapt to $19.2 billion in early December, its highest level in two years, according to information platform Coinglass. It's now between $17 billon and $18 billion, up from the $9.5-$14.5 billion range seen for most of 2023.
"We eagerly await the SEC's decision," said analysts at analytics firm Amberdata. "This event has been factored into the options market's pricing since October, creating a heightened sense of anticipation."
It's been a long road for U.S.-listed spot ETFs linked to volatile bitcoin , which would allow access to the cryptocurrency via regular stock exchanges in a marriage with mainstream finance that could attract big investors.
Multiple asset managers have applied for permission to launch spot bitcoin ETFs since 2013, but the SEC has rejected them, arguing products would be vulnerable to market manipulation.
But by the end of 2023, a year in which the discussions and lobbying intensified, the SEC was holding talks with firms keen to issue ETFs, raising hopes that the long-awaited funds would hit market and trigger waves of bitcoin investment.
Bitcoin's funding rates have jumped across most exchanges this year, indicating traders are willing to pay more to maintain long positions, and funding rates have been mostly positive since October, according to Coinglass.
Those leaps took place as spot bitcoin rose above the $45,000 level on Jan. 2, following a 170% rise in 2023.
Excitement has gripped both retail and institutional investors, with premiums soaring for bitcoin futures on the Chicago Mercantile Exchange (CME).
"CME's front-month BTC premium has averaged 42% since the yearly open, a new all-time high, telling of the massive long bias presently in the market," analysts at K33 Research said.
Beware bumpy bitcoin, though.
With so much bullishness baked in, negative news on a spot ETF could spark a wave of selling, many market watchers warn.
After its initial jump, bitcoin's spot price dropped back below $43,000 though it has since recovered. As it slid, it triggered "a wave of liquidations, with bitcoin open interest dropping by more than $1 billion in just a few hours as leverage was flushed out of the market," said Dessislava Aubert, senior analyst at Kaiko Research.
Jag Kooner, head of derivatives at Bitfinex, said even approval of a spot ETF could cause a pullback in prices as investors book profits, which "highlights the market's sensitivity to news and regulatory developments."
In the bitcoin options market, at-the-money implied volatility - the market's estimate of a likely movement in price - is at its highest levels in a year, according to data from The Block.
Options contracts give their buyers the right, but not an obligation, to buy or sell an underlying asset at a fixed price in the future.
Coinglass' crypto fear & greed index, a measure of market sentiment, is at a two-month high and firmly in "greed" territory for the past 30 days, indicating "fear of missing out" sentiment is at elevated levels.
