Hi readers,

Welcome to our institutional newsletter, Crypto Long & Short. This week:

• Gregory Mall on how ETFs have shifted a growing share of bitcoin volatility into U.S. equity options markets
• Top headlines institutions should pay attention to by Francisco Rodrigues
• Mid-caps show surprising strength in Chart of the Week

Thanks for joining us!

-Alexandra Levis

Expert Insights

When ETF options start driving bitcoin

- By Gregory Mall, chief investment officer, Lionsoul Global

The launch of U.S. spot bitcoin ETFs marked a structural turning point. The iShares Bitcoin Trust ETF (IBIT) rapidly became one of the fastest-growing ETFs in history, drawing tens of billions into a regulated vehicle. Less discussed, but equally important, is what followed: the rapid expansion of IBIT options.

Over the past year, open interest in IBIT options has climbed into the multi-billion-dollar range. On selected high-volume sessions, activity has approached levels historically associated with Deribit, the cryptocurrency futures and options exchange. A meaningful share of bitcoin’s convexity now sits inside U.S. equity options markets rather than offshore crypto venues.

That shift matters because it changes how volatility is transmitted.

From offshore leverage to onshore gamma

For most of its history, bitcoin BTC$68,684.11 volatility was driven by offshore perpetual futures. Funding imbalances, leverage build-ups and liquidation cascades shaped price action.

ETF options introduce a different mechanism.

When investors buy calls or puts on IBIT, dealers typically sell that optionality and hedge delta exposure. If dealers are short gamma, which is common when investors are net long options, they must buy as price rises and sell as price falls. These hedging flows are inherently procyclical and can amplify underlying moves.

Because IBIT holds physical bitcoin, hedging does not remain confined to the wrapper. Arbitrage and creation and redemption flows transmit ETF positioning into the underlying market. Bitcoin increasingly participates in the same positioning mechanics that influence equity indices.

The structure of ETF options markets, where investors are generally net long optionality, suggests dealers are often warehousing short gamma during periods of elevated demand. This dynamic likely intensified during the February episode, when volatility had been subdued and crypto-native participants accumulated downside puts. Sustained option buying in a low-volatility regime leaves market makers short convexity across both ETF and offshore venues. When spot breaks, hedging flows can reinforce the feedback loop. In the graph below we show the movement of IBIT option volume and BTC U.S.-hours realized volatility. We can see that the relationship has strengthened over the past weeks.

Chart 1 illustrates the co-movement between IBIT option volume and BTC U.S.-hours realized volatility, showing that their relationship has strengthened in recent weeks. To formally evaluate this relationship, we regress bitcoin realized volatility on lagged IBIT options volume while controlling for BTC funding rates, equity returns (Nasdaq Composite), implied volatility (CBOE Volatility Index, or VIX), short-term interest rate changes and U.S. dollar movements. The results indicate that IBIT options trading activity is significantly associated with BTC volatility even after accounting for broader macroeconomic conditions.

Chart 1: Movement of IBIT option volume and BTC U.S.-hours realized volatility

Table 1: OLS regression IBIT options volume on BTC volatility

Table 2: BTC volatility distribution pre and post IBIT Options

We split the data into before vs. after IBIT options began trading. For each hour of the day (UTC), we measure how much bitcoin’s price moved in that hour. Then we convert it into a share of the day’s total volatility — so each column adds up to 100%. The highlighted band (14:00-16:00 UTC) lines up with peak U.S. trading activity, especially the U.S. cash equity open. After, IBIT options volatility becomes more concentrated in these U.S. hours — suggesting more price discovery and hedging flow is happening when U.S. markets are most active.

February as illustration

The early February selloff provides a useful example. Bitcoin fell sharply during one of the most extreme cross-asset deleveraging episodes in recent years. Yet IBIT recorded net creations rather than redemptions, which argues against retail panic.

In a thoughtful Substack post, Jeff Park suggested the catalyst was cross-asset positioning amidst some of the big multistrategy funds rather than crypto-specific stress. Correlations between bitcoin and high-beta software equities tightened materially, indicating multi-asset portfolios were being indiscriminately de-risked.

At the same time, the CME bitcoin basis widened dramatically. Near-dated basis moved from roughly three percent to close to nine percent. Such a move is consistent with multi-strategy funds unwinding delta-neutral basis trades by selling spot or ETFs and buying futures under gross exposure constraints.

As prices declined into that environment, existing short-gamma positioning may have amplified the downside through mechanical delta-hedging. Dealers' short convexity must sell into weakness. The sharp rebound that followed on Friday the 6th is consistent with hedges being rebalanced once acute pressure subsided.

The episode illustrates a broader point. Bitcoin now participates in the same balance sheet and derivatives mechanics that govern equities and other risk assets.

Digital gold, or leveraged Nasdaq?

This evolution complicates the “digital gold” narrative. Bitcoin’s correlation with gold has historically been unstable and often close to zero over shorter horizons. BlackRock’s Head of Digital Assets, Robert Mitchnick, has argued that heavy speculative positioning can cause bitcoin to behave more like a leveraged Nasdaq proxy than a macro hedge. This observation is directionally correct. In Chart 3 we are showing that the BTC-Nasdaq correlation during U.S. trading sessions approximately doubled since inception of IBIT options. Increasingly, however, it is not only speculative longs that matter. Delta-neutral strategies and derivatives positioning inside traditional markets now contribute to volatility feedback loops.

Chart 2: Bitcoin’s correlation with Nasdaq pre- and post IBIT options

Bitcoin began outside the financial system. The success of IBIT and IBIT options shows it is now embedded within it. For long-term allocators, this does not invalidate the structural case for digital scarcity. It does mean that short-term price action is increasingly shaped by positioning, hedging and cross-asset flows.

Bitcoin is no longer trading outside the system. It is trading inside it.

The information contained herein is provided for informational and educational purposes only and should not be construed as investment, legal, or tax advice. Nothing contained in this document constitutes an offer to sell, or a solicitation of an offer to buy, any securities, investment products, or advisory services.

Lionsoul Global Advisors LLC is registered with the Texas State Securities Board (CRD #: 324883). The advisory services provided by Lionsoul Global Advisors are available exclusively to non-U.S. investors who meet applicable eligibility, accreditation, and qualification standards under relevant laws and regulations.

Headlines of the Week

- By Francisco Rodrigues

Trump’s Mar-a-Lago crypto summit would’ve been unthinkable just a few years ago. Now we’re not only getting that, but also a $17 billion trading volume debut of a crypto-linked ETF and more in a single week.

• Goldman Sachs, Franklin Templeton, and Nicki Minaj: Inside Trump’s surreal Mar-a-Lago crypto summit: The World Liberty Financial form at Mar-a-Lago included figures from traditional finance, crypto and real estate in an intimate setting, with panels touching on crypto and the future of tokenized real estate.
• To freeze or not to freeze: Satoshi and the $440 billion in bitcoin threatened by quantum computing: Quantum computing is slowly moving closer to reality, and as it does, nearly 7 million bitcoin could potentially be at risk. That includes Satoshi Nakamoto’s estimated 1 million BTC.
• ProShares’ stablecoin-ready ETF sees $17 billion debut, sparking speculation about Circle: ProShares’ IQMM money market ETF, designed to comply with U.S. stablecoin reserve requirement under the GENIUS Act, saw $17 billion in first-day trading. That sparked speculation that stablecoin issuers could be moving funds.
• Bitcoin balances on Binance hit highest since November 2024 – here's what it means: Users’ bitcoin holdings in Binance-linked wallets are at their highest level since late 2024, which could have bearish implications on an already depressed market.
• Specialized AI detects 92% of real-world DeFi exploits: Purpose-built AI could detect vulnerabilities in 92% of 90 exploited decentralized finance (DeFi) contracts, accelerating concerns over offensive AI capabilities.

Chart of the Week

Mid-caps show surprising strength as large caps lag bitcoin

While Bitcoin is down 27.7% YTD and large-cap indices like the CD5 and CD20 are underperforming it (down 30% and 32% respectively), the CD80 is showing resilience with a shallower drawdown of only 20.91%. This represents a 7% relative outperformance against Bitcoin, a reversal of the typical "risk-off" dynamic where smaller assets crash harder than the lead. This strength suggests a "seller exhaustion" phase for mid-caps, where the heavy weightings of idiosyncratic performers like Hyperliquid (HYPE) and Canton Coin (CC) are decoupling from the broader institutional sell-off seen in large-caps.

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