Wall Street is rewriting the rules of Bitcoin trading

(Bloomberg/Sidhartha Shukla) — Wall Street is seizing control of Bitcoin’s center of gravity.

Once ruled by offshore venues and retail-driven fervor, the world’s largest cryptocurrency is now increasingly priced and steered from within the US financial system.

Through a fast-growing market in exchange-listed options tied to ETFs and indexes, retail and increasingly institutional players are redefining how Bitcoin trades — from tactical hedges to volatility strategies — all without touching the underlying asset. What began as a subversive experiment for crypto natives is being retooled for the playbooks of traditional finance.

At the center of the action is BlackRock Inc.’s iShares Bitcoin Trust, IBIT. Now the biggest Bitcoin ETF with $86 billion in assets, it’s also catalyzed an options market so active that industry players are pushing regulators to lift position caps.

Open interest in IBIT-linked options has more than tripled this year to around $34 billion, a scale that signals the fund’s emergence as a core engine of crypto risk pricing. Daily volumes has averaged $4 billion in recent trading, surpassing heavyweight funds in credit and emerging markets. Only the most liquid ETFs tied to US equities, gold, and small caps trade more actively.

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“It’s highly unusual for an ETF to develop an option market of this magnitude ever, let alone eight months after launch,” said Rocky Fishman, founder of Asym 500 LLC.

Regulatory filings compiled by Bloomberg show the number of institutions holding IBIT has almost doubled since the end of last year — a sign of how swiftly traditional players are entering the market. IBIT punches above its weight in the options market, generating the lion’s share of trading activity among US Bitcoin ETFs even though it holds just a bit more than half the group’s total assets. That underscores how central it’s become to how the market manages risk.

The ETF’s ascent marks a transformation in the architecture of crypto markets, away from leverage-driven, offshore platforms and into the regulated core of the US financial system. Its growth is fueling a reinforcing cycle: liquidity brings legitimacy, which in turn attracts more flows.

“For a long time, crypto options failed to gain institutional traction because they were offshore,” said Kevin de Patoul, CEO of market maker Keyrock. “Now, with spot ETFs and US-listed options, institutions finally have an access point that fits their playbook.”

For allocators long boxed out by regulatory gray zones, the arrival of compliant, onshore tools marks a shift from passive access to active positioning, and the adoption has been swift. These strategies mirror playbooks long used in equity and bond markets — framing Bitcoin as just another form of risk to manage.

“This flow has a natural dampening effect on volatility and prevents panic selling,” said Greg Magadini, director of derivatives at Amberdata.

He said the shrinking difference between call and put prices on IBIT — even outside big rallies — suggests a shift in behavior. Instead of retail traders chasing upside with bullish bets, more investors appear to be using puts to hedge against losses, a pattern more typical of institutional strategies.

At the same time, the geography of price discovery is changing. According to Kaiko, the share of Bitcoin-dollar trades, the dominant global trading pair, taking place during US hours has jumped to 57.3% from 41.4% in 2021. FalconX Research data show that nearly 50% of spot Bitcoin volumes now flow through the 12 US-listed ETFs.

IBIT’s options surge is narrowing the distance with Deribit — the leading offshore derivatives venue still favored by crypto-native traders.

For now, IBIT and Deribit act like two separate markets. In theory, that fragmentation presents an opportunity to arbitrage pricing discrepancies. Yet with the two running on different collateral systems and limited capital mobility, it’s hard to put on trades in size, according to Le Shi, Hong Kong managing director at market maker Auros.

“There’s no unified collateral system yet,” Shi said. “But stablecoins could eventually help bridge the gap.”

One event seen as a step toward more integration is Coinbase’s $2.9 billion acquisition of Deribit in May. The firms are now working to improve the link between their platforms, says Luuk Strijers, Deribit’s chief executive.

“This could eventually include more seamless movement of collateral, unified risk frameworks, and even exposure netting across venues — steps that would naturally increase trading opportunities,” he said.

Yet even as connectivity improves, structural limits remain. IBIT’s options market is hitting a wall. A regulatory cap of 25,000 contracts — meant to manage risk — limits how much institutions can deploy systematic strategies at scale.

Unless the SEC raises caps, IBIT’s utility in the volatility market may stall — just as asset managers look to boost systematic strategies. A February study from Cboe Global Markets Inc. found the current cap restricts risk exposure to a fraction of what’s possible via rivals like MBTX and CBTX.

In January, Nasdaq submitted a proposal to increase IBIT’s position limit by tenfold. The Securities and Exchange Commission has until September to issue a decision. Many view a favorable outcome as a turning point that would deepen liquidity by allowing market makers and traders to manage larger exposures.

“We’ll likely see a non-trivial increase in option volumes from current levels once those constraints are lifted,” said Robbie Mitchnick, head of digital assets at BlackRock, in an interview.

While regulatory caps may have slowed IBIT’s momentum in the options market, they haven’t stopped its rise as Wall Street’s primary gateway to crypto. That means as Bitcoin matures, it’s being folded into the same financial machinery that once dismissed it — with IBIT at the center of the shift.

“Eventually, all assets will be digital,” said de Patoul. “And what we now call crypto will just be another part of the financial system — priced, hedged, and risk-managed like everything else.”

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