October 27, 2024
Bitcoin price breaks from range with drop below K, and options tilt toward BTC bears

On August 16, Bitcoin (BTC) closed below $29,000 for the first time in 56 days. Analysts were quick to point to this week’s FOMC minutes, which voiced concerns about inflation and the need for rate hikes, as a possible reason.

Despite the immediate reason for the drop, the upcoming expiration of $580 million in bitcoin options on Friday favors the bears. They could make a $140 million profit on Aug. 18, adding to the downward pressure on Bitcoin and complicating BTC’s search for a bottom.

Fed Minutes Haven’t Impacted Traditional Markets

On August 16, Federal Reserve Chairman Powell emphasized the 2% inflation target. That pushed U.S. 10-year Treasury yields to their highest level since October 2007, prompting investors to move away from riskier assets such as cryptocurrencies and into cash positions and companies well prepared for such a scenario.

Notably, before the release of the Fed minutes, Bitcoin had fallen to $29,000, its lowest point in nine days. The minutes’ impact was limited, especially given that 10-year Treasury yields have been rising, suggesting skepticism about the Fed’s ability to control inflation.

Additionally, on Aug. 17, S&P 500 futures were down just 0.6% from levels seen before the Aug. 16 event. Over the same period, WTI crude oil rose 1.7%, while gold fell 0.3%.

Concerns about the Chinese economy may also have contributed to the decline. The country’s retail sales growth and fixed asset investment were weaker than expected, which could affect the demand for cryptocurrencies.

While the exact reason for the price drop remains uncertain, there is a possibility that Bitcoin will reverse its trend after weekly options expire on August 18.

Bitcoin bulls bet wrong

The price of bitcoin briefly breached the $29,700 mark between Aug. 8 and 9, sparking optimism among traders using options contracts.

Deribit August 18 Bitcoin options total open interest. Source: Deribit

The put-to-call ratio of 0.57 reflects the difference in open interest between $365 million in calls (buys) and $205 million in puts (sells). However, the result will be below the total open interest of $570 million, as the latest price drop below $29,000 caught bulls off guard.

For example, if the price of Bitcoin is $28,400 on August 18th at 8:00 AM UTC, only $3 million worth of call options are considered. This distinction stems from the fact that the right to buy bitcoin for $27,000 or $28,000 would lapse if BTC traded below these levels at expiration.

Below are the three most likely scenarios based on current price action. The number of options contracts available for the August 18 call (buy) and put (sell) instruments varies based on the price at expiration. An imbalance in favor of both parties constitutes a theoretical profit:

  • Between $26,000 and $28,000: 100 calls and 5,300 puts. The final result was in favor of a put (sell) instrument of $140 million.
  • Between $28,000 and $28,500: 100 calls and 3,900 puts. The final result was in favor of a bearish (sell) instrument of $60 million.
  • Between $28,500 and $29,500: 600 calls and 1,300 puts. The final result was in favor of a bearish (sell) instrument of $20 million.

Bitcoin bears are likely to maintain an edge given investors’ growing concerns about an economic slowdown due to central bank actions to control inflation. This trend is not limited to the upcoming Friday expiry and is expected to continue, especially considering the likelihood of BTC bulls’ main short-term goal – the approval of a spot ETF – is rather remote.

As a result, those who were bullish found themselves in a bind. The success of their call (buy) option relies on Bitcoin expiring above $28,500. In the most likely scenario, the bears could get a favorable outcome at $140 million, suggesting a further correction in the price of Bitcoin is possible.