Latest / The Cryptocurrency Economy with Fexingo: Bitcoin, Ethereum, and Digital Money Markets / Why Crypto Options Open Interest Is Shrinking
Transcript
- Lucas: Bitcoin is up seven-tenths of a percent in the last five days. Ethereum up nearly four percent. Spot prices feel stable, even quietly constructive. Luna: Yeah, but the derivatives market is telling a different story. Open interest in crypto options has been steadily declining since May. Lucas: That's the angle I want to dig into today. Because when open interest contracts while spot price holds, something structural is usually shifting under the surface. Luna: So what are we looking at specifically? Which contracts, which exchange? Lucas: The broadest picture comes from Deribit and the CME. Across bitcoin and ether options, total open interest peaked around early May at roughly $38 billion notional. As of this week, it's down to about $31 billion. Luna: That's about an eighteen percent drop in a little over two months. And it's not just bitcoin — ether options are down even more proportionally. Lucas: Right. Ether options open interest has fallen from around $13 billion to just under $10 billion. That's a twenty-three percent decline. And the really interesting part is that this isn't driven by spot selling or a price crash — both assets are basically flat over that period. Luna: So traders aren't fleeing the asset, they're just not using options. Why? Is it a volatility thing? Lucas: Partially. Implied volatility for both bitcoin and ether has been grinding lower since March. The twenty-five delta skew — which tells you whether puts or calls are more expensive — has also compressed. That suggests fewer people are positioning for big directional moves. Luna: But that's usually a sign of a maturing market, right? Lower volatility, tighter spreads, more efficiency. Lucas: It can be. But there's another factor here that I think is more telling. The Fed funds rate is at three point six three percent and the Dallas Fed president just called for modestly higher rates. That's a headwind for any carry trade or structured product that relies on cheap financing. Luna: Meaning institutions that were using options as part of yield enhancement strategies are pulling back because the cost of capital just got higher. Lucas: Exactly. A lot of the open interest growth in 2024 and early 2025 was driven by basis trades and covered call writing from institutional desks. When you can borrow at low rates and earn yield from options premiums, it's attractive. But with rates staying elevated and the Fed hinting at more hikes, the math gets tighter. Luna: So the open interest decline might be less about market sentiment and more about a mechanical adjustment in institutional participation. Lucas: That's my read. But there's a nuance: while total open interest is down, the composition has shifted. Put open interest has actually held up better than call open interest. The put to call ratio has ticked up from about zero point four to zero point six over the past six weeks. Luna: So even if institutions are pulling back overall, the residual options activity is more hedged. More protection-oriented. Lucas: Right. And that lines up with what we're seeing in the macro headlines. The Dallas Fed's Logan saying rates need to go higher — that's not a backdrop that encourages aggressive bullish positioning. So the traders still in the options market are buying insurance, not betting on upside. Luna: It's almost like the options market is pricing in a higher probability of downside, even though spot price hasn't moved much. Lucas: And that disconnect is exactly why this matters. If open interest were shrinking because people were exiting positions outright, you'd expect spot to weaken. But spot is holding. So the decline is more about a reduction in new positioning — fewer new trades being put on — rather than a mass unwind of existing ones. Luna: Which actually makes the market more fragile, doesn't it? Less liquidity in the options market means less ability to hedge large spot positions, which could amplify any sudden move. Lucas: That's the risk. Lower open interest typically means thinner order books for options, wider bid-ask spreads. If a big event happens — say a surprise Fed decision or a regulatory headline — the options market could gap, and that would feed back into spot via delta hedging. Luna: So we're in a period where the spot market looks calm, but the plumbing underneath is getting a bit brittle. Lucas: Exactly. And this isn't just about bitcoin and ether. Solana options open interest is down even more aggressively — off about thirty-five percent from its May peak. Though Solana's spot price has also weakened, so that's a more conventional correlation. Luna: What about the CME specifically? That's where institutional flow tends to show up. Lucas: CME open interest is down about twelve percent, which is less severe than Deribit. But the CME skew has also shifted more toward puts. So the pattern is consistent across venues. Luna: I want to zoom out a bit. If this is largely a macro-driven adjustment — higher rates, hawkish Fed — how long could this open interest compression last? Lucas: Until the rate outlook changes materially. If the Fed cuts later this year or next, the carry trade comes back, and institutions will rotate back into options strategies. But if rates stay at three point six or go higher, this could persist for quarters. Luna: We've seen this before though. In 2023, open interest contracted for about six months before roaring back when the macro outlook softened. Lucas: Good parallel. In 2023, bitcoin options open interest fell from about $20 billion to $14 billion between February and August, then doubled over the next twelve months. So this cycle could be similar — a patience game. Luna: But the difference is that in 2023, spot was also rising. This time spot is flat. So the recovery might take longer. Lucas: That's the bear case. The bull case is that the current open interest level still represents a very active market by historical standards. $31 billion in bitcoin and ether options is still higher than any month before 2024. So we're not back to 2022 levels. Luna: Good point. This is a pullback from a peak, not a collapse. Lucas: And one more thing: the decline in open interest has been accompanied by a decline in options trading volume, but not as steep. Volume is down about ten percent. That suggests some traders are still active, but they're closing positions rather than opening new ones. Luna: That actually reinforces the idea that this is an institutional pullback rather than retail. Retail tends to just stop trading altogether when conditions get less favorable. Lucas: You know, this kind of deep dive into market microstructure is exactly the kind of thing that makes this show worthwhile for me. If walking through the economy with us has made something click — whether it's understanding open interest or just getting a clearer picture of how markets work — it's worth knowing that listener support is what keeps this ad-free. Luna: Yeah, absolutely. If today's episode was worth a coffee to you, there's a link — buy me a coffee dot com slash fexingo. It's a small way to keep the conversation going. Lucas: Back to the options market though — I want to touch on one more data point that I think is really telling. The expiration profile. Most of the open interest is concentrated in the next thirty to sixty days, with very little further out. Luna: So traders are hedging near-term risk but not committing to longer-dated views. Lucas: Exactly. The December 2026 bitcoin options have open interest of only about $1.2 billion, compared to over $8 billion for the July and August expiries combined. That's a very short-dated market right now. Luna: Which makes sense if you think the macro picture could change in a few months. Why lock in a long-dated option premium when rates might shift? Lucas: And that brings us full circle. The options market is essentially saying: we'll wait and see. Which is a reasonable stance given where we are in July 2026. Luna: So the key takeaway for listeners: don't mistake low open interest for disinterest. It's a strategic pause, not an exit. Lucas: Right. And if open interest starts to tick up again, especially in longer-dated contracts, that will be a real signal that institutional conviction is returning. Until then, the market is just waiting for the next catalyst.