The last few months have been less fun for Bitcoin (BTC) bulls, but they are not alone. Constant comments from the US Federal Reserve point to plans to raise interest rates in 2022, which will force investors to seek protection in inflation-linked bonds.
The Norwegian Financial Supervisory Authority has announced its intention to increase the basic interest rate significantly, and will also gradually reduce the monthly purchase of debt funds.
Although some cryptocurrency investors view the lack of digital bitcoin as a hedge against inflation, this does not change volatility. In turn, this causes the price of the asset to move in step with the risk markets.
Bitcoin price on Coinbase, US dollar (right) and Russell 2000 index (left)
The chart above shows the price of bitcoin in blue against smaller US listed companies, according to the Russell 2000 stock index. Unlike the S&P 500 or the Dow Jones Industrial Average, this reference does not include technology giants. Thus, smaller companies are generally considered more risky and suffer more when investors fear an economic downturn.
However, the negative results did not scare investors as Canada’s Purpose Bitcoin ETF raised more than $ 38 million in bitcoin on Tuesday, the third largest daily inflow to date. The fund currently owns 31,032 BTC, equivalent to $ 1.2 billion.
Regardless of investor sentiment, bitcoin bulls could face a $ 120 million loss if the price of BTC falls below $ 36,000 when the options expire on Friday.
The $ 730 million options expire on February 4.
According to open interest rates, which expire on Friday, bitcoin speculators have made large bets from $ 40k to $ 44,000. These levels may seem bullish at the moment, but two weeks ago Bitcoin traded above $ 42,000.
Bitcoin options gather open interest rates on February 4. Source: Coinglass
At first glance, $ 430 million dominates put options on $ 300 million sales ratios, but the buy-to-call ratio of 1.43 does not tell the whole story. For example, a price drop of 14% over the last two weeks has wiped out most of the bullish bets.
A call option gives the buyer the right to buy BTC at a fixed price at 08.00 UTC 4 February. But if the market trades below this price, it is useless to keep this derivative contract, so the value tends to zero.
Therefore, if Bitcoin stays below $ 37,000 at 08:00 GMT on February 4, only $ 34 million of call (buy) options will be available at expiration.
The Bears will fight to keep Bitcoin below $ 37,000
Here are the three most likely scenarios for option expiration on Friday. The imbalance in favor of each side represents the theoretical merit. In other words, depending on the expiry price, the active number of buy (buy) and sell (sell) contracts changes:
$ 35,000 to $ 37,000: 950 calls to 4,210 locations. The net result is 120 million dollars in favor of penalties (bears).
$ 37,000 to $ 38,000: 1650 calls for 3300 pips. The net profit for Bears Tools is $ 60 million.
$ 38,000 to $ 39,000: 4,230 calls for 1,710 pips. The end result is balanced buying and selling alternatives.
This estimate takes into account call options used in bullish games and put options only in neutral or bearish trades. However, this oversimplification overlooks more complex investment strategies.
Bulls need $ 38,000 to balance their weight
A price jump of only 3% from the current 36,900 dollars is enough for bitcoin speculators to avoid losing 120 million dollars when the options expire on 4 February. However, the same reasoning also applies to bitcoin bears, because fixing BTC below $ 37,000 can easily lock in $ 120 million in winnings.
Given the negative short-term sentiment driven by tighter macro conditions, Bitcoin speculators should increase the energy for a sustained recovery to $ 40,000 or higher instead of wasting their efforts. So options market data is somewhat in favor of put options.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade involves risk. You need to do your research when making a decision.