The Dec. 4 correction that saw Bitcoins price fall from $57,000 to $42,000 is still fresh in the minds of Bitcoin (BTC). The 26.5% downturn caused $850M in long BTC futures contracts that were worth $850 million to be cancelled. But, more importantly, it moved the “Fear and Greed” index to its lowest level since July 21.
Price of Bitcoin/USD at FTX Source: TradingView
Its strange to compare the two events as the July 21 sub-30k low would have erased all gains in 2021. The 44% year-to-date gain is maintained at 42,000, despite the Dec. 4 low of $42,000 This compares to the S&P 500 which is up 21% in 2021 and the WTI oil price which has seen a 41% increase.
The Bitcoin reserves at exchanges continue to fall and are currently at their lowest level in three decades. Bulls may be focusing on this. CryptoQuant data shows that there are currently less than 2.27million Bitcoins deposited at exchanges. This means that there are fewer trading signals available, which investors may not be willing to sell. This dynamic is considered bullish by many investors.
Even though the balance between put (sell) and call (buy) options expires Friday at $1.1 billion, bears are now better placed after Bitcoin stabilized slightly above $50,000.
Bitcoin options open interest aggregate for Oct. Source: CoinGlass
The call-to-put ratio gives a narrower view that shows a slight advantage to Bitcoin bulls. This is because the $555million call (buy) instruments have more open interest than the $520 million put option (sell). The 1.07 indicator can be misleading as the 11.5% drop in the price of Bitcoin over the past week has made most bullish bets worthless.
If Bitcoins price is below $52,000 at 8:00 UTC on December 10, then only $50 million worth call (buy) options would be available. This is because the right to purchase Bitcoin at $55,000 is worthless if it is not trading below that price.
According to the numbers, bulls are in for a big loss
Based on current price action, here are the three most likely outcomes. The expiry BTC price will determine the number of options contracts that are available for bulls (call) or bears (put) instruments on December 10. The theoretical profit is the result of an imbalance in favor of each side.
400 calls for between $47,000 and $50,000 vs. 6,600 put. The net result favors the put (bear), instruments. Between $50,000 and $54,000, 1,700 calls vs. 4.700 puts. The net result favors the put (bear), instruments by $160 million. Above $54,000: 2,400 calls against 2,900 puts. The put (bear), options are favored by $30 million.
This rough estimate includes both the bullish options and neutral-to-bearish options. This oversimplification ignores complex investment strategies.
A trader might have sold a call option to gain negative exposure to Bitcoin above a certain price. Unfortunately, its not possible to accurately estimate the effect.
Bears will try to keep BTC under $50,000
To make a profit of $300 million, Bitcoin bears will need to push the price down to below $50,000 To reduce their losses by half, bulls would require a 7.2% price rebound from the current $50,000.
Given the Dec. 4 liquidation of leverage long positions worth $2 billion, bulls will likely try to stay afloat but wont take on more risk. Bullish investors would not waste their time trying to save this short-term loss.
In this instance, bears appear to have the upper hand at weekly options expiry.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.