A perfect storm is brewing for Bitcoin

Opinion by Mehdi Lebbar, co-founder of Exponential.fi.

Bitcoin (BTC) is the world’s most reflexive asset today. The United States Securities and Exchange Commission recently approved options for several Bitcoin exchange-traded funds (ETFs). Once issued, these options lead to gamma squeezes, acting like reflexivity. Together, that’s reflexivity squared, leading to unprecedented price movements. 

The launch of spot Bitcoin ETFs was already a landmark event for the financial world. In their first month, BlackRock’s and Fidelity’s Bitcoin ETFs attracted unprecedented inflows, each accumulating $3 billion — setting records for ETF launches. 

That, however, was only the beginning. The true catalyst is the introduction of options trading on these ETFs, which could significantly increase liquidity in the market.

Bitcoin: The most reflexive asset in the world

Financial markets are deeply influenced by human behavior. George Soros famously coined the concept of “reflexivity” to describe the circular relationship between perception and reality in financial markets. Bitcoin exemplifies this concept more than any other asset: As its price rises, the asset garners increasing attention, which leads to further investment, driving prices even higher.

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Prominent investors such as Jamie Dimon and Warren Buffett have criticized Bitcoin because of its reflexive nature. They have argued that it lacks intrinsic value because its price seems to move based on perception. But that is precisely the point: Bitcoin is the most reflexive asset because its supply is genuinely finite, more finite than precious metals or top-performing equities. The scarcity of Bitcoin is what makes it fundamentally valuable.

Bitcoin ETF options and the gamma squeeze

Options trading on Bitcoin ETFs adds a layer to Bitcoin’s reflexive nature. Options give investors the right, but not the obligation, to buy or sell Bitcoin ETFs at a predetermined price. When investors expect Bitcoin’s price to rise, they purchase call options on the ETFs. The institutions that sell these options are forced to hedge their exposure by buying Bitcoin or Bitcoin ETFs, increasing demand for the underlying asset.

This hedging process can create a feedback loop known as a “gamma squeeze.” As Bitcoin’s price rises, option sellers must buy more of the asset to hedge their positions, increasing the cost. Like natural reflexivity, a gamma squeeze amplifies price movements, creating a self-reinforcing loop that can lead to significant price appreciation.

Historically, Bitcoin advocates have pointed to its decreasing volatility across market cycles, suggesting that as adoption grows, Bitcoin may one day serve as a stable unit of measurement. In the near term, however, introducing options trading on Bitcoin ETFs will likely reintroduce heightened volatility, offering both opportunities and risks.

Reflexivity squared

The first reflexivity is that Bitcoin is a genuinely finite asset. The second reflexivity is that the pending options on Bitcoin ETFs will introduce gamma squeezes. With each uptick in price fueling further optimism and more aggressive hedging, we could see a compounding effect that propels Bitcoin’s price to levels previously deemed improbable.

As this new era of Bitcoin ETF options unfolds, the potential for dramatic price increases becomes all the more real. Reflexivity squared is at play, and we may soon witness a perfect storm for Bitcoin’s price.

Mehdi Lebbar is the co-founder of Exponential.fi, a DeFi investment platform on a mission to make decentralized finance accessible to all. He combines a background in investment banking, tech entrepreneurship, and crypto. Mehdi holds an MBA from Harvard Business School.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.