Although the past few months have not been pleasant for Bitcoin (BTC), bulls are not alone. The United States Federal Reserve has been making consistent comments about plans to raise interest rates by 2022. This is leading investors to look into inflation-protected bonds for protection.
The monetary authority indicated its intention to significantly increase the benchmark interest rate. They will also reduce the monthly purchases of debt assets.
Although some crypto investors consider Bitcoin digital scarcity to be inflationary protection, this does not alter its volatility. It causes asset prices to move in tandem and risk markets.
Bitcoin price at Coinbase USD (right) vs. Russell 2000 Index (left)
The chart above shows Bitcoin’s price in blue relative to smaller U.S. companies as measured by Russell 2000 equity market index. This benchmark does not include tech giants like the Dow Jones Industrial Index or S&P 500. Investors fear that the economy will turn, so smaller companies are often more at risk.
Investors were not worried by the poor performance. The Purpose Bitcoin ETF, based in Canada, attracted more than $38 million worth Bitcoin on Tuesday, making it its third largest daily inflow. The fund currently holds 31,032 BTC which is equivalent to $1.2 million.
No matter how investors feel, Bitcoin bulls could lose $120 million if the price drops below $36,000 by Friday’s expiry of options.
Options worth $730 million expire Feb. 4
According to Friday’s options expiry, open interest, Bitcoin bulls made large bets of between $40,000- $44,000. Although these levels may seem optimistic now, Bitcoin traded above $42,000 just two weeks ago.
For February 4, 2018, Bitcoin options have an aggregated open interest of $4. Source: Coinglass.com
Although the $330 million call (buy), options seem to dominate the $300 million put(sell) instruments, the 1.43 call/put ratio doesn’t tell the whole story. The 14% drop in price over the past 2 weeks has wiped out most bullish wagers.
The buyer can buy Bitcoin at a fixed price on February 4, at 8:00 UTC. If the market trades below this price, then there is no point in holding a derivative contract. Its value is reduced to zero.
If Bitcoin is below $37,000 by 8:00 UTC on February 4, only $34,000,000 of these call (buy) options may be available at expiry.
Bears will fight for Bitcoin to stay below $37,000
These are the most likely outcomes for Friday’s expiry of options. The theoretical profit is the ratio of each side to the other. The expiry price determines the amount of active call (buy) or put (sell) contracts.
Between $35,000 to $37,000: 950 calls and 4,210 puts. The net result favors the put (bear), instruments by $120 million. Between $37,000 and $38,000, 1,650 calls vs. 3300 puts. The net result favors bear instrument by $60 million. Between $38,000 and $39,000, 4,230 calls vs. 1,710 put. The net result is a balance between put and call options.
This rough estimate includes call options in bullish bets, and put options in neutral-to bearish trades. This oversimplification ignores complex investment strategies.
To balance the scales, bulls will need $38,000
Bitcoin bulls can avoid a $120million loss by merely pumping 3% from the $36,900 price level. Bitcoin bears can still benefit from the same logic, as pinning BTC below $37,000 could easily result in a $120million profit.
Bitcoin bulls need to be mindful of the negative short-term sentiment caused by tighter macroeconomic circumstances. They should not waste their efforts now, but instead focus on a sustained recovery to $40,000 or higher. Options markets data favor selling options.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.