Bitcoin (BTC) has jumped 11% from the low of $39,650 on January 10 and is currently struggling with the $44,000 level. There are many explanations for the recent weakness, but none of them seem to be enough to justify the 42% retracement that has occurred since the all-time high on November 10 at $69,000.
At that time (November 12), negative comments were received from the US Securities and Exchange Commission (SEC) regarding the rejection of VanEck’s physical Bitcoin ETF. The regulator cited the failure to avoid market manipulation due to unregulated exchanges and high trading volumes based on the restrictions of the stablecoin (USDT).
Therefore, on December 17, the US Financial Stability Oversight Board recommended that state and federal regulators review the rules and tools that can be used in relation to digital assets. On January 5, the price of BTC corrected again after the December FOMC meeting, which confirmed plans to ease debt payments and potentially raise interest rates.
In the derivatives markets, if the bitcoin price drops below $42,000 by the end of January 14th, the bears will have a net profit of $75 million on their bitcoin options.
Bitcoin options collect open interest rates on January 14th. Source: Coinglass.
At first glance, $455 million put (call) options outweighed $295 million, but the buy to call ratio of 1.56 is misleading as a 14% price drop over the past three weeks is likely to wipe out most of the upside rates. …
If the bitcoin price remains below $44,000 at 08:00 UTC on January 14, only $44 million of these call (buy) options will be available at expiration. There is no value in the right to buy Bitcoin for $44,000 if BTC is trading below this price.
Bears can make a profit of $75 million if BTC is below $42,000.
Here are the four most likely scenarios for the $750 million options expiring on January 14th. The imbalance in favor of each side is a theoretical advantage. In practice, depending on the expiration price, the number of call (buy) and sell (sell) contracts that become active varies:
$40,000 to $43,000: 480 calls for 2,220 positions. The net result is $75 million, which is in favor of put options.
$43,000 to $44,000: 1,390 calls for 1,130 points. The net result is a balance between buying and selling options.
$44,000 to $46,000: 1,760 calls for 660 positions. The net result is $50 million, which favors call (bullish) options.
$46,000 to $47,000: 1,220 calls for 520 positions. The net result is $125 million, which favors call (bullish) options.
This approximation takes into account buy options used in neutral bearish play and exclusively call options in bullish trades. However, this simplification ignores more complex investment strategies.
For example, a trader can sell a put option and receive a positive share of bitcoins above a certain price. Unfortunately, there is no easy way to calculate this effect.
Related: Traders say $44,000 of bitcoin could be a relief, citing the December recurrence of ‘nuclear weapons’.
Bulls need $46,000 to win
The only way for the bulls to make significant gains by the end of January 14th is to keep the bitcoin price above $46,000. However, if the current negative short-term sentiment prevails, the bears could easily push the price 4% lower from the current level of $43,800 and increase profits. Up to $75 million if the bitcoin price stays below $42,000.
For now, the options markets appear to be in balance, giving bulls and bears an equal chance of expiration on Friday.