Compass Investments

– The launch of U.S. spot bitcoin ETF trading was a landmark structural moment. The iShares Bitcoin Trust ETF (IBIT) has rapidly become one of the fastest-growing ETFs in history, attracting billions of dollars into the regulated instrument. Less discussed, but no less significant, has been the dramatic increase in IBIT options activity.

Over the past year, open interest in IBIT options has grown to multi-billion dollar levels. In some high-turnover sessions, activity approached the levels we are used to seeing on Deribit, a crypto exchange specializing in futures and options. A significant portion of bitcoin’s market convexity is now centered on U.S. equity-options exchanges, rather than OTC crypto exchanges.

This shift is important because it changes the transmission mechanisms of volatility.

Previously, volatility was largely driven by OTC perpetual futures. Price movements were driven by funding imbalances, rising leverage and chain liquidations.

ETF options trigger a different process.

When investors buy calls or puts on IBITs, dealers typically sell them and hedge the delta. If dealers get short gamma (which is often the case with investors’ net long options positions), they have to buy when the price rises and sell when it falls. Such hedging flows are procyclical by nature and can amplify fluctuations in the underlying asset.

Since IBIT holds physical bitcoin, hedging is not limited to the instrument. Arbitrage and the processes of unit creation and redemption shift ETF positioning to the underlying market. Bitcoin is increasingly involved in the same positioning mechanisms as stock indices.

The structure of ETF options markets, where investors are more likely to have a net long position in options, implies that dealers often accumulate a short range during periods of increased demand. This trend likely intensified during the February events, when volatility was low and crypto participants were accumulating protective (bearish) puts. The sustained demand for options in a low volatility environment leads market makers to get short on “convexity” in both ETFs and external markets. When a breakout occurs, hedging flows can reinforce the feedback loop. The chart below shows a comparison of changes in IBIT options trading volume and observed BTC volatility during U.S. hours. This correlation has become more pronounced in recent weeks.

Figure 1 shows how IBIT options volume and realized BTC volatility in the U.

S. have changed, noting the strengthening of their relationship in recent weeks.

To analyze this correlation more rigorously, we ran a regression of bitcoin realized volatility on lagged IBIT options volume, while accounting for BTC funding rates, stock performance (Nasdaq Composite), implied volatility (CBOE Volatility Index, or VIX), short-term interest rate changes, and U.S. dollar movements. The results suggest that IBIT trading activity meaningfully affects BTC volatility, even after controlling for broader macroeconomic factors.

We divided the data into “before” and “after” the start of IBIT options trading. For each hour of the day (UTC), we measure how much the bitcoin price changed in that hour. We then express this as a fraction of the total daily volatility – so the sum of each column is 100% .

The highlighted interval (14:00-16:00 UTC) coincides with the peak of trading activity in the US, especially when US stock markets open. After that, the volatility of IBIT options becomes more concentrated during these American hours, which indicates that the bulk of price movements and hedging flows occur during the hours of maximum activity of American platforms.

An illustrative example is the collapse in early February. Bitcoin fell sharply during one of the strongest episodes of leverage reduction in recent years. However, IBIT showed net inflows of funds, not outflows, indicating a lack of panic among retail investors.