Since the Sept. 7 rejection of $53,000, Bitcoin (BTC), has been trading in a declining pattern. The $3.4 billion liquidation of futures contracts and China’s ban against crypto trading seem to have had a severe impact on traders’ morale.
To add to the negativity, major crypto exchanges Binance and Huobi stopped some services in China and many of the largest Ethereum mining pools like Sparkpool, BeePool, were forced to close down.
Coinbase: Bitcoin price in USD Source: TradingView
The above chart explains why buyers bet at $44,000 and higher. These call (buy) options have lost value rapidly over the past two week.
The People’s Bank of China (PBoC), posted a nationwide ban against crypto on Sept. 25th. It also barred all companies from providing financial services and transactions to market participants. This news caused a drop in Bitcoin’s value of 8% and a wider pullback on altcoins.
After Elon Musk, Tesla CEO, expressed support for cryptocurrency at the Code Conference held in California, the bearish sentiment was reinforced.
“It’s not possible to destroy crypto but it is possible for governments slow down its progress.”
These remarks would have likely reversed the downward trend if we had been in a neutral to bullish market. On July 21, Elon Musk stated that Bitcoin had exceeded his benchmark for renewable energy. The result was that the Bitcoin price dropped by 12% within ten days and then rose 35% in the next ten.
Bulls will face a test of strength on Oct. 1, as any price below $42,000 is a bloodbath that results in absolute dominance by put (sell) options.
Open interest in Oct. 1 bitcoin options Source: Bybt.com
Initial week expiry was dominated by the $285 million neutral to-bullish instruments, 21% more than the $320,000,000 puts (sell) options.
The 1.21 call-to–put ratio is misleading because bulls’ excessive optimism could cause them to lose all their bets, if Bitcoin prices remain below $43,000 on Friday at 8:00 AM UTC.
It’s not worth having Bitcoin for $50,000 if it’s still trading below that price.
Surprise catch of bears also happened
Sixty-six per cent of the put options (where the buyer has a right to buy Bitcoin at a predetermined price) have been set at $42,000 or less. If Bitcoin trades at or above this price Friday morning, these neutral-to-bearish instruments are worthless.
These are the most likely scenarios based on current prices. The potential profit from expiry is represented by the imbalance favoring one side.
This data indicates how many contracts will still be available Friday depending on the expiry date.
110 calls for between $40,000 and $41,000 vs. 4,470 put. The net result favors protective put (bears) instruments by $175 million. Between $41,000 and $43,000, 640 calls vs. 4,470 puts. The net result favors bears by $140million. Between $43,000 and $45,000, 1,780 calls vs. 2,070 put. The net result is balanced between bulls and bears. Above $45,000: 2,530 call vs. 1,090 put. By $65 million, the net result favors bulls.
This rough estimate includes call (buy), options in bullish strategies, and put (sell), options in neutral-to bearish trades. Real life isn’t always so simple. It’s possible to deploy more complicated investment strategies.
A trader might have sold a put option to gain exposure to Bitcoin at a higher price. This effect is difficult to quantify so the above analysis is only a rough estimate.
At the moment, the bears hold absolute control over the Oct. 1 expiry date and have several good reasons to keep the price below $43,000.
Unless there is an unexpected buying pressure in the next 12 hour, the capital required by bulls to push the market over the $45,000 threshold appears enormous and unjustified.
To increase their lead by 35 million, bears require a 5% negative swing in BTC that is below $41,000. This move is also very inefficient for the effort it takes.
A surprise positive newsflow regarding Bitcoin prices ahead of October 1st at 8:00 AM UTC is the bull’s only hope. Any sensible action that is likely to take place will be during the weekend when there’s less activity.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.