Fundamental analysis

It seems that the institutional demand for Bitcoin and crypto-related products has been increasing lately. According to Nikolaos Panigirtzoglou, who serves as Managing Director at banking giant J.P. Morgan, the market is eagerly anticipating the launch of the Chicago Mercantile Exchange (CME) Group Inc. options.

Panigirtzoglou believes that the CME entrance can significantly alter the picture due to CME’s dominance in trading Bitcoin futures on regulated exchanges. Accordingly, the number of large open-interest holders has grown.

“There has been a step increase in the activity of the underlying CME futures contract over the past few days. This unusually strong activity likely reflects the high anticipation among market participants of the option contract,” Panigirtzoglou wrote in a note to clients last week.

However, the registered higher interest doesn’t necessarily mean higher Bitcoin prices. When Bakkt started offering its Bitcoin-based options, Bitcoin price fell more than 10% in the days after the launch.

“The market price has declined by nearly 40% from its peak while the intrinsic value has risen by around 10%,” Panigirtzoglou wrote. But “the gap has not yet fully closed, suggesting some downside risk remains.”

Panigirtzoglou refers to Bitcoin’s intrinsic value, which is calculated by looking at the marginal cost of Bitcoin production, including computational power employed, and the cost of electricity. According to JP Morgan, Bitcoin’s current intrinsic value is around $5000.

CME, which was one of the first institutional institutions to offer futures trading on Bitcoin in December of 2017, is expected to launch the Bitcoin options this week.

“CME options on Bitcoin futures give the buyer of a call/put the right to buy/sell one Bitcoin futures contract at a specified strike price at some future date. Upon termination of trading, in-the-money options, expire into one Bitcoin futures contract which immediately cash settles to the CME CF Bitcoin Reference Rate (BRR),” the company noted.

The Bitcoin options market is getting increasingly crowded. It was announced this week that crypto exchange FTX has launched Bitcoin options, which according to FTX CEO, reached a $1 million volume in the first two hours of trading. According to CoinGecko, FTX is currently the eighth-largest crypto exchange by traded volume.

Elsewhere, Japan continues to further regulate the Bitcoin and cryptocurrency market. Japan’s Financial Services Agency (FSA) is looking to limit the use of leverage in cryptocurrency trading to twice the size of the deposits of a trader.

The provision will be implemented to reduce the risks of losses that increase multiple times due to price volatility. Local media reports that the provision will be included in the amended version of the Financial Instruments and Exchange Act, to be promulgated in spring this year.

The FSA decided to cap the leverage after it analysed crypto-related regulation in the United States and Europe, as well as the historic price action. Once the new rules have entered into force, the Agency is expected to follow up with registered cryptocurrency exchanges to have these changes incorporated into their operations.

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