Friday, October 7, 2022

Options data shows Bitcoin’s short-term uptrend is at risk if BTC falls below $23K

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Bitcoin (BTC) briefly broke above $25,000 on Aug. 15, however the pleasure lasted lower than an hour and was adopted by a 5% retrace within the subsequent 5 hours. The resistance degree proved to be harder than anticipated however could have given bulls false hope for the upcoming $335 million weekly choices expiry.

Buyers’ fleeting optimism reverted to a sellers’ market on Aug. 17 after BTC dumped and examined the $23,300 help. The unfavorable transfer passed off hours earlier than the discharge of the Federal Open Markets Committee (FOMC) minutes from its July assembly. Buyers anticipate some insights on whether or not the Federal Reserve will proceed elevating rates of interest.

The unfavorable newsflow accelerated on Aug. 16 after a federal courtroom in the USA approved the U.S. Inner Income Service (IRS) to power cryptocurrency dealer SFOX to reveal the transactions and identities of customers who are U.S. taxpayers. The same strategy was used to obtain information from Circle, Coinbase and Kraken between 2018 and 2021.

This movement explains why betting on Bitcoin price above $25,000 on Aug. 19 seemed like a sure thing a couple of days ago, and this would have incentivized bullish bets.

Bears didn’t expect BTC to move above $24,000

The open interest for the Aug. 19 options expiry is $335 million, but the actual figure will be lower since bears were overly-optimistic. These traders might have been fooled by the short-lived dump to $22,700 on Aug. 10 because their bets for Aug’s options expiry extend down to $15,000.

<em>Bitcoin options aggregate open interest for Aug. 19. Source: Coinglass</em>

The 1.29 call-to-put ratio shows the difference between the $188 million call (buy) open interest and the $147 million put (sell) options. Currently, Bitcoin stands near $23,300, meaning most bullish bets are likely to become worthless.

If Bitcoin’s price moves below $23,000 at 8:00 am UTC on Aug. 19, only $1 million worth of these call (buy) options will be available. This difference happens because a right to buy Bitcoin at $23,000 is useless if BTC trades below that level on expiry.

There’s still hope for bulls, but $25,000 seems distant

Below are the three most likely scenarios based on the current price action. The number of options contracts available on Aug. 19 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $21,000 and $23,000: 30 calls vs. 2,770 puts. The net result favors the put (bear) instruments by $60 million.
  • Between $23,000 and $25,000: 940 calls vs. 1,360 puts. The net result is balanced between bulls and bears.
  • Between $25,000 and $26,000: 3,330 calls vs. 100 puts. The net result favors the call (bull) instruments by $80 million.

This crude estimate considers the put options used in bearish bets and the call options exclusively in neutral-to-bullish trades. Even so, this oversimplification disregards more complex investment strategies.

For example, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price, but unfortunately, there’s no easy way to estimate this effect.

Related: Former Goldman Sachs banker explains why Wall Street gets Bitcoin wrong

Bears will attempt to pin Bitcoin below $23,000

Bitcoin bulls must push the value above $25,000 on Aug. 19 to revenue $80 million. Alternatively, the bears’ greatest case situation requires stress below $23,000 to maximise their features.

Bitcoin bulls simply had $144 million in leveraged futures lengthy positions liquidated on Aug. 16, so they need to have much less margin to drive the value increased. With this stated, bears have the higher hand to suppress BTC below $23,000 forward of the Aug. 19 choices expiry.

The views and opinions expressed listed here are solely these of the author and don’t essentially replicate the views of Cointelegraph. Each funding and buying and selling transfer entails risk. You must conduct your personal analysis when making a choice.