Illiquid Bitcoin Options

This paper conducts a first look into the regulated Bitcoin options market in the United States. Compared to stock options, bitcoin options tend to be ten times more illiquid as measured by bid-ask spreads. The illiquidity significantly affects bitcoin options pricing: Given that investors are on average net sellers of bitcoin options, heightened illiquidity is associated with a significant premium in subsequent deltahedged returns, which also strengthens under more imbalanced investor orders. To support the reasoning behind our findings, we further exploit a policy change that allows retail participation and significantly influences order imbalances in the Bitcoin options market.