Better Markets filed a supplemental comment letter with the Securities and Exchange Commission urging the SEC to reject a proposed rule change filed by Nasdaq ISE, LLC, seeking to list and trade options on the iShares Bitcoin Trust. The SEC approved Nasdaq’s listing and trading of the iShares Bitcoin Trust in January 2024. We said that the SEC should not compound the mistake that it made in approving this spot bitcoin exchange-traded product (ETP) by approving the listing and trading of options on the ETP.
Why It Matters. Investors in spot bitcoin ETPs are essentially investing in bitcoin. This means that bitcoin’s notorious volatility impacts investors in spot bitcoin ETPs. Recent events show the riskiness and potential adverse market impacts of allowing options trading on spot bitcoin ETPs where the asset underlying the ETP is the notoriously volatile bitcoin. In August 2024, bitcoin fell 15% in a 24-hour period. In early September, bitcoin fell 7.5% over a week. This coincided with spot bitcoin ETPs losing $1.2 billion over eight days. Despite this volatility, the presence of well-known firms as the issuers of spot bitcoin ETPs appears designed to give retail investors a false sense of security. This means that spot bitcoin ETPs expose retail investors to the risks that come with investing in bitcoin to an unprecedented degree. Options trading on spot bitcoin ETPs would only further exacerbate those risks.
What We Said. Although sophisticated investors may use options to hedge against risk, most investors in spot bitcoin ETPs have been retail investors, and retail investors are increasingly trading options. The problem is that in the hands of retail investors options are akin to gambling. Between November 2019 and June 2021, for example, retail investors lost over $2 billion trading options. So options trading is risky for retail investor generally. Indeed, options trades are typically unsuitable for retail investors even in the case of traditional securities such as stocks. The risks of options trading for retail investors would be compounded exponentially in the case of options on spot bitcoin ETPs because bitcoin itself is so volatile and options trading on such a volatile asset would be especially perilous.
Bottom Line. Better Markets opposes the listing and trading of options on spot bitcoin ETPs.
