Income ETFs could be bitcoin’s volatility kill switch

Investors who thrive on bitcoin’s BTC$74,026.03 wild price swings may be in for disappointment. Major banks are preparing to introduce new products that could dampen volatility in a market that has already become significantly calmer in recent years.

Most recently, Goldman Sachs filed an application for a Bitcoin Premium Income exchange-traded fund (ETF). The proposed fund relies on selling (writing) options tied to bitcoin-linked exchange-traded products to generate income while providing investors with exposure to the cryptocurrency. BlackRock is looking to launch a similar product.

Selling options is essentially writing insurance against price swings. The writers collect a premium in exchange for providing downside or upside protection, while being exposed to potentially significant losses if the market moves sharply. Traders often use covered strategies — holding the underlying asset or ETFs while writing options — to partially offset risk.

If approved, the ETFs may employ similar covered options strategies to generate yield, though the exact structures will vary by product.

Whatever the case, the net impact would be calmer market conditions. That's because when options are sold in large numbers, dealers or market makers who take the other side of these trades end up with long positions. To manage their risks, these entities then dynamically hedge by buying the underlying asset on declines and selling on rallies. This dynamic is called hedging the positive gamma exposure, and it tends to restrain volatility.

In addition, the availability of yield-generating institutional-grade products may suck capital away from pure speculative bets, further lowering realized volatility over time. Bitcoin's implied volatility has been declining for three years, primarily due to the growing popularity of options-selling strategies.

Today bitcoin BTC$74,026.03 has pulled back to $74,000 after hitting highs near $76,000 on Tuesday. The CoinDesk 20 Index has dropped over 1% in 24 hours.

A firm breakout is expected to happen if the U.S. stock indexes hit new record highs.

"If Bitcoin is looking for external signals, it may remain indecisive until key US stock indices hit new highs. However, we are more inclined to believe that the first cryptocurrency’s stagnation is a sign of a fragile risk appetite that will soon manifest in the broader market," Alex Kuptsikevich, chief market analyst at the FxPro said in an email.

In the meantime, the IMF flashed a warning on the rising global debt, strengthening the bull case in bitcoin. Stay alert!

Read more: For analysis of today's activity in altcoins and derivatives, see Crypto Markets Today . For a comprehensive list of events this week, see CoinDesk's "Crypto Week Ahead."

What’s trending

• Trump hints at war’s end as Hormuz standoff chokes oil flows (Bloomberg): President Donald Trump played down the prospect of renewed fighting in Iran, even as questions remain over Tehran’s nuclear program and access to the Strait of Hormuz.
• Nasdaq logs longest winning streak since 2021 as investors look beyond war (The Wall Street Journal): U.S. markets are rebounding, with the Nasdaq Composite index adding 14% over 10 sessions as strong corporate earnings outweighed war risks. Wall Street banks posted record trading revenues. Tech stocks are benefiting from an AI computing-power arms race.
• A new class of crypto treasury companies is forming around Strategy’s high-yield stock (CoinDesk): A new class of crypto treasury companies is emerging around Strategy’s high-yield stock, STRC, with a growing number of companies and decentralized finance protocols buying it to capture the yield while gaining indirect exposure to bitcoin.

Today’s signal

Bitcoin’s daily chart showing the 100-day simple moving average. (TradingView)

Bitcoin is struggling to rise past its 100-day simple moving average, a widely watched technical level that reflects the average closing price over the period.

This pattern is reminiscent of mid-January, when sellers regained control at the 100-day average and stalled the recovery. Bitcoin saw a sharp decline in the days that followed.

The question now is whether history will repeat itself, or if this time the level finally gives way, paving the way for faster gains to $80,000 and higher.