In today’s newsletter, independent digital asset commentator Dumpling Bullish writes about the growing influence of Bitcoin’s derivatives stack on its price.
Next, in Ask an Expert, ML Tech’s Leo Mindyuk answers questions about the evolution of Bitcoin investment products.
-Sarah Morton
Discovery of the price of Bitcoin: no longer just a story of demand
For most of its history, bitcoin has had a simple pricing logic: limited supply, growing demand, and occasional panic in between. This logic still exists. He’s just not running the show anymore.
What runs the show now is the derivatives stack at the top of the asset.
From spot market to leverage system
Over the past decade, bitcoin has evolved from a primarily spot market to a multi-tiered derivatives ecosystem. Futures contracts, perpetual swaps, options, exchange-traded funds (ETFs), structured products, and prime brokerage loans have transformed the way price discovery occurs.
CME futures launched in December 2017, giving institutions a regulated and scalable way to sell bitcoin for the first time and providing a mechanism to express bearish views at the top of what had been a 19x run. The asset saw a decline of 80%. It didn’t kill Bitcoin. This allowed disagreements to be priced more effectively.
Then came ETF approvals in 2024, which served as the basis for a new layer of derivatives within U.S. equity markets.
Each addition has not changed what Bitcoin is. This has changed where and how its price is discovered.
Three variables that now matter most
Real yields and dollar strength provide the macroeconomic backdrop. Bitcoin is increasingly traded as a high beta liquidity asset and when global risk appetite contracts, it sells alongside stocks and other risky assets, regardless of what the blockchain does.
Bitcoin 30-day rolling correlation with Nasdaq (QQQ), 2011-present
Source: Newhedge
Derivatives positioning tells the story in the short term. The CME’s open interest and perpetual funding rates reveal whether a price action is based on genuine new demand or leveraged speculation that will eventually unravel violently. When funding rates remain consistently positive, the market pays a premium to be long – and this premium is a signal of fragility.
CME Bitcoin Futures Open Interest and Prices, December 2017 – Today
Source: CME Group via TradingView
The mechanisms of ETF options have introduced a new transmission channel. When institutional investors purchase calls or puts on the iShares Bitcoin Trust ETF (IBIT), the brokers selling these options must hedge themselves by trading the underlying ETF and, in some cases, the associated futures or spot exposure. This hedge is procyclical. When Bitcoin rises, traders must buy more; when it goes down, they have to sell. Modest directional movements are amplified mechanically. The result is that a significant portion of Bitcoin’s short-term volatility is now generated primarily by equity market structure.
Financialization is not an extinction
Gold offers a useful parallel. The development of futures and ETFs has not eliminated the scarcity of gold. It integrated gold into global macro portfolios and amplified its volatility during liquidity cycles. Bitcoin is undergoing a similar integration process at a faster pace. It is absorbed into the overall risk budgeting system. This absorption provides institutional capital, liquidity and legitimacy. It also brings correlation, reflexivity, and occasional violent outcomes driven by forces that have nothing to do with protocol.
Rarity remains intact at the protocol level. But its influence on prices is increasingly subordinated to the cost of capital and the mechanisms of the derivatives stack. Bitcoin is not losing its scarcity narrative. It acquires a liquidity identity.
Scarcity anchors the asset. Liquidity sets the marginal price.
– Dumpling Bullish, independent digital assets commentator
Ask an expert
Question : Over the past few years, Bitcoin investment products have shifted from spot exposure to futures, options, and ETFs. How do you see the evolution of Bitcoin financial products shaping the way investors access the asset?
The evolution of Bitcoin investment products mirrors the path we have seen in traditional asset classes. Early participants primarily accessed Bitcoin through direct ownership – purchasing and holding the asset itself on crypto exchanges. Over time, as institutional interest grew, the market began to develop a broader toolkit: regulated futures and options, regulated structured products and fund structures, and, more recently, spot ETFs.
This expansion is important because it moves bitcoin from just a speculative asset to something that can be integrated into portfolio construction and risk management frameworks. Different investors have different needs. Some want direct exposure to the asset’s price movement, while others want regulated vehicles, derivatives for hedging purposes, or ways to express more nuanced opinions about the market.
As the ecosystem evolves, financial products are making it easier to access Bitcoin through familiar structures, reducing barriers for institutional investors and expanding the ways the asset can be incorporated into diversified portfolios.
Q: In traditional markets, financial products often evolve from simple exposure to more complex structures such as leveraged, inverse and derivatives-based strategies. Are we starting to see a similar progression in the Bitcoin ecosystem?
Yes, and it’s a natural progression. In most asset classes, markets start with simple spot exposure and gradually develop layers of financial instruments that allow investors to manage risk, hedge their positions, or express different opinions about the market. Bitcoin is following the same trajectory.
Initially, the focus was simply on exposure to the asset itself. Today we are seeing a more developed ecosystem that includes derivatives, volatility trading and structured products. These tools allow investors to do much more than just speculate on price appreciation. They can hedge downside risk, trade volatility, or develop market-neutral strategies.
What’s interesting is that cryptocurrency markets often move faster than traditional markets because the infrastructure is digital and global. As liquidity deepens and regulatory frameworks become clearer, we will likely see even more sophisticated products emerge that resemble strategies commonly used in equity, commodities and fixed income markets. For example, I expect growth in various income-generating ETFs – instruments for inverse, leveraged or exposure based on broader crypto factors. Additionally, we will likely see considerable growth in crypto options markets.
Q: With the growth of futures markets and the introduction of spot ETFs, how might the next generation of Bitcoin products expand investor use cases, whether for hedging, leverage, or more sophisticated portfolio strategies?
Futures markets already allow investors to hedge their exposure or express directional opinions without directly owning the asset. ETFs have made bitcoin accessible through traditional brokerage accounts. The next logical step is to offer products focused on portfolio outcomes.
As this happens, bitcoin begins to look less like a standalone transaction and more like a building block of a wallet. This is ultimately where the market is heading: giving investors the flexibility to express their opinions about the market in a much more nuanced and sophisticated way, with easy access.
– Leo Mindyuk, CEO and CIO, ML Tech
