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On Friday, $700 million in Bitcoin options expire, and derivatives data indicates that bears are well-positioned to profit from a Bitcoin price of less than $45,000.
Since the strong $53,000 rejection on Sept. 7, Bitcoin (BTC) has been trading in a descending pattern, and the $3.4 billion futures contract liquidation, as well as China’s ban on crypto trading, appear to have severely impacted traders’ morale.
To add to the negative sentiment, major cryptocurrency exchanges such as Binance and Huobi have suspended some services in mainland China, and some of the largest Ethereum mining pools like Sparkpool and BeePool were forced to shut down completely.
Based on the above chart, it is easy to see why buyers placed 80% of their bets at $44,000 or higher. However, over the last two weeks, those call (buy) options have clearly lost value.
On September 25, the People’s Bank of China (PBoC) issued a nationwide crypto ban, prohibiting companies from providing financial transactions and services to market participants. The news caused an 8% drop in Bitcoin’s price, as well as a broader pullback in altcoins.
Tesla CEO Elon Musk expressed his support for cryptocurrency at the Code Conference in California, adding to the bearish sentiment.
“It is not possible to, I think, destroy crypto, but it is possible for governments to slow down its advancement.”
If we were in a neutral-to-bullish market, those remarks would almost certainly have reversed the downward trend. For example, on July 21, Elon Musk stated that Bitcoin had already met his renewable energy benchmark. As a result, Bitcoin’s price, which had previously dropped 12 percent in ten days, reversed course and increased 35 percent in the following ten days.
The Oct. 1 expiry will be a litmus test for bulls because any price below $42,000 means a bloodbath with put (sell) options dominating.
Initially, the $285 million neutral-to-bullish instruments outnumbered the $320 million puts (sell) options by 21 percent.
However, the 1.21 call-to-put ratio is misleading because bulls’ overconfidence could wipe out the majority of their bets if Bitcoin remains below $43,000 at 8:00 a.m. UTC on Friday.
After all, what good is a right to purchase Bitcoin for $50,000 if it is currently trading below that price?
Bears were also caught by surprise
Sixty-six percent of put options, which give the buyer the right to sell Bitcoin at a predetermined price, have been priced at $42,000 or less. If Bitcoin trades above that level on Friday morning, these neutral-to-bearish instruments will become worthless.
The four most likely scenarios, taking current price levels into account, are listed below. The potential profit from the expiry is represented by the imbalance favouring either side.
Depending on the expiry price, the data shows how many contracts will be available on Friday.
- Between $40,000 and $41,000: 110 calls vs. 4,470 puts. The net result is $175 million favoring the protective put (bear) instruments.
- Between $41,000 and $43,000: 640 calls vs. 4,000 puts. The net result continues to favor bears by $140 million.
- Between $43,000 and $45,000: 1,780 calls vs. 2,070 puts. The net result is balanced between bears and bulls.
- Above $45,000: 2,530 calls vs. 1,090 puts. The net result shifts in favor of bulls by $65 million.
This rough estimate takes into account only call (buy) options in bullish strategies and put (sell) options in neutral-to-bearish trades. Unfortunately, real life is not that simple because more complex investment strategies may be employed.
A trader, for example, could have sold a put option, effectively gaining positive exposure to Bitcoin above a certain price. As a result, there is no easy way to estimate this effect, so the simple analysis above is a good approximation.
Bears currently have complete control of the Oct. 1 expiry, and they have a few good reasons to keep pushing the price below $43,000.
Unless there is some unexpected buying pressure in the next 12 hours, the amount of capital required for bulls to force the market above the $45,000 threshold appears enormous and unjustified.
Bears, on the other hand, require a 5% negative price swing that pushes BTC below $41,000 to increase their lead by $35 million. As a result, this move yields little return for the amount of effort required.
The bulls’ only hope is for some unexpectedly positive newsflow for Bitcoin price ahead of October 1 at 8:00 a.m. UTC. If any sensible action is likely to take place, it will most likely take place on the weekend, when there is less active flow.