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The causes of the BTC rally are most likely the hash rate, supply shock, and credit risk in the United States.
As Friday’s $860 million options expiry approaches, Bitcoin’s (BTC) 32 percent weekly rally has become bears’ worst nightmare. Over 99 percent of bearish bets using put (sell) options are likely to become worthless once the $54,000 level is breached.
Bears are in a perilous position, especially since Bloomberg’s Crypto Outlook predicted that Bitcoin’s $50,000 resistance was about to give way to support. Senior commodity strategist Mike McGlone cited factors such as rising adoption and dwindling supply on exchanges.
Bloomberg also reported that traditional finance investors’ concerns increased after protection against the possibility of a US government default reached its highest level in six years. Furthermore, one-year credit-default swaps, or the cost of insuring against a payment delay, have risen from 4 to 27 basis points since mid-September.
Another important metric that undoubtedly fueled this week’s bull run was Bitcoin’s hash rate, which is the estimated processing power supporting network miners. In May, China vetoed the use of coal-based energy for cryptocurrency mining, causing a significant reduction in capacity. The country then decided to permanently ban cryptocurrency mining in early June, which temporarily took many miners offline and impacted the hash rate.
This week, the bulls picked up on these favorable conditions and pushed Bitcoin to its highest level since May 12 at $55,000. As for the $860-million options expiry on Friday, Oct. 8, bears need a miracle to push the price below $50,000 to avoid significant losses.
Bears bet $400 million on Friday’s expiry, according to the data above, but it appears that they were caught off guard, as 99 percent of the put (sell) options are likely to become worthless.
In other words, if Bitcoin remains above $54,000 on Friday, only $2.7 million in neutral-to-bearish put options will be exercised at the expiration. If Bitcoin trades above $50,000 at 8:00 a.m. UTC on Friday, a right to sell (put option) it becomes worthless.
Open interest is fairly balanced between bulls and bears
The call-to-put ratio of 1.16 represents the slight difference between the $465 million in call (buy) options and the $400 million in put (sell) options. Despite favouring bulls, this broader view requires a more detailed examination because some bets are implausible given the current price.
The four most likely scenarios for Friday’s expiry are listed below. The theoretical profit is represented by the imbalance favouring either side. In other words, the number of active calls (buy) and puts (sell) contracts varies depending on the expiry price:
- Between $48,000 and $50,000: 3,515 calls vs.1,765 puts. The net result is $85 million favoring the call (bull) instruments.
- Between $50,000 and $54,000: 6,270 calls vs. 735 puts. The net result is $290 million favoring the call (bull) instruments.
- Between $54,000 and $56,000: 6,930 calls vs. 50 puts. The net result is $370 million favoring the call (bull) instruments.
- Above $56,000: 7,600 calls vs. 0 puts. The net result is a complete dominance with bulls profiting $425 million.
This raw estimate considers call options being exclusively used in bullish bets and put options in neutral-to-bearish trades. However, investors might have used a more complex strategy that typically involves different expiry dates.
Bears are wrecked one way or another
To summarise, the bulls have complete control of the Friday expiry and sufficient incentives to keep the price above $54,000. Bears, on the other hand, require a 10% negative move below $50,000 to avoid a $370 million loss.
However, during bull runs, such as the one Bitcoin is currently experiencing, the amount of effort required for a seller to put in to liquidate longs is enormous and usually ineffective. Simply put, if no surprises emerge before October 8, Bitcoin should continue its upward trend.