The launch of spot Bitcoin ETFs has become a milestone event in the financial world. Within the first month of their launch, BlackRock and Fidelity's Bitcoin ETFs attracted as much as $3 billion in inflows, setting a new record for ETF listings.
However, this is just the beginning. The real catalyst is the launch of these ETF options, which will significantly increase market liquidity.
Financial markets are deeply influenced by human behavior. George Soros has proposed the "reflexivity" theory, describing the circular relationship between perception and reality in financial markets. Bitcoin embodies this concept more than any other asset: as the price rises, Bitcoin gains more attention, triggering more investment, and further driving up the price.
Renowned investors such as Jamie Dimon and Warren Buffett have criticized the reflexivity of Bitcoin, arguing that it lacks intrinsic value because its price seems to fluctuate solely based on market perception. However, this is the core feature of Bitcoin: due to its limited supply, the scarcity of Bitcoin makes it more valuable than precious metals or even high-performing stocks.
The trading of Bitcoin ETF options adds another layer of complexity to its reflexivity. Options give investors the right to buy or sell Bitcoin ETFs at a predetermined price. When investors expect Bitcoin prices to rise, they purchase call options. The institutions selling these options need to buy Bitcoin or Bitcoin ETFs to hedge the risk, thereby increasing the demand for the underlying asset.
This hedging process may form a feedback loop, known as a "gamma squeeze". As Bitcoin prices rise, option sellers need to purchase more assets to hedge the risk, further driving up the price. This cycle amplifies price volatility, creating a self-reinforcing mechanism that could lead to significant price spikes.
Historically, Bitcoin supporters have pointed out that its volatility in market cycles has been gradually decreasing, suggesting that as adoption increases, Bitcoin may one day serve as a stable unit of account. However, in the near term, the launch of Bitcoin ETF options may reintroduce high volatility, presenting a situation with both opportunities and risks.
The first layer of reflexivity stems from Bitcoin's attribute as a scarce asset. The second layer of reflexivity comes from the gamma squeeze triggered by Bitcoin ETF options. As each price increase drives stronger market optimism and more aggressive hedging behavior, a compounding effect may push Bitcoin prices to levels that were previously considered impossible.
With the advent of the Bitcoin ETF options trading era, the potential for dramatic price increases has become more realistic. "Double reflexivity" is at play, and we may soon witness the perfect storm for Bitcoin prices.
