How Centralized and OTC Markets Shape Institutional Crypto Strategies

As the cryptocurrency market matures, driven by growing institutional, corporate, and possibly governmental adoption, the role of the crypto options market is becoming increasingly crucial. This segment helps investors deploy tailored strategies for hedging, leverage, and yield generation while providing deeper insights into market sentiment.

Crypto options markets are primarily divided into centralized exchanges and the over-the-counter (OTC) market. Recent open interest data from platforms like Deribit, CME and OKX reveals that total listed bitcoin options reached new heights in late November, surpassing USD 40 billion.

However, ether options remain relatively underwhelming, with open interest totalling just USD 9.8 billion, down from a peak of USD 14.5 billion in March. Deribit, the leading platform for bitcoin, ether, and altcoin options, dominates the space, accounting for nearly 90% of the total open interest.

The open interest data on Deribit paints a picture of a positive outlook in bitcoin options. With over USD 19 billion in call options versus USD 9.4 billion in puts at the beginning of December, the market is clearly positioning for continued upward movement. A significant portion of this open interest — USD 5 billion — is concentrated in call options with strike prices between USD 100,000 and USD 120,000, expiring in December and March 2024 [source: Deribit]. The pronounced Call-Put skew [e.g. 25D 1month +5% on December 2nd], where out-of-the-money calls carry higher implied volatility premiums than puts, indicates strong demand for leverage over downside protection.

Centralized exchanges, with their user-friendly platforms and transparent real-time data, offer individual investors insight into market sentiment through trading activity, order flow, and liquidity. However, institutional investors are increasingly turning to the crypto OTC market for more customized solutions, greater privacy, and the ability to execute larger-volume trades.

Many of these OTC deals are governed by master agreements such as the ISDA Master Agreement and Credit Support Annex (CSA), which allow for highly tailored trades with flexible strike prices, expiration dates and collateral management terms.

Trading with regulated entities: a gateway for institutional investors

For institutional investors aiming to deploy bespoke options strategies and invest in yield-generating products, trading OTC options with a regulated entity is often the preferred route. Regulated counterparties provide a structured, transparent framework that minimizes counterparty risk and ensures compliance with legal and regulatory standards. Through this approach, institutions can execute large trades without the constraints typically found in the more public and less flexible centralized exchange environment.

Furthermore, the use of master agreements in OTC transactions offers significant advantages in terms of risk management and flexibility. These agreements enable institutions to customize the terms of their trades — such as the choice of strike prices, expiration dates, and collateral arrangements — while minimizing credit exposure through robust due diligence processes. As institutional demand for sophisticated options strategies continues to grow, regulated OTC counterparties will play an increasingly pivotal role, offering liquidity, security, and the capacity to manage large positions in an efficient and customized manner.