After a 14% rally on February 28, Bitcoin (BTC), bulls turned the tables on March 4. The fact that the price is above $43,000 indicates that there has been a disconnect from traditional markets. The MSCI Emerging Markets Equities Index fell by 3.5% over five days while the US Russell 2000 Small-Capitalization Index gained 0.9%.
Investors are becoming more concerned about the potential ramifications of U.S. Federal Reserve rate increases expected to occur throughout 2022. Some big names have suffered losses over the past 30 trading days. Paypal PYPL fell 38%, META corrected 34%, and Shopify SHOP dropped 31.5%.
Investors took profits on more risky assets due to the 40-year-high U.S. Consumer Price Index 7.5% inflation data. The U.S. Dollar Index reached its highest level in 20 month at 97.6. The DXY is a measure of the strength of the dollar against a basket top foreign currencies. It increases when traders seek refuge in North-American money.
Although Bitcoin has a high-risk reputation, its price seems to be in the low range
Bitcoin’s recent strength has surprised many investors. Its correlation with the Nasdaq Composite index reached 73% Feb. 20, just shy of the 74% five year high in 2020.
The March 4th options expiry date is the same for both call (buy) or put (sell), but bears were taken by surprise when the Bitcoin price stabilised above $43,000.
For March 4, bitcoin options have an aggregated open interest of $44 Source: CoinGlass
The call-to-put ratio provides a wider view that shows the balance between the $450million call (buy) open and the $440 million put option (sell). The 1.02 call-to–put indicator is misleading because most bearish wagers will be worthless.
If Bitcoin’s price is above $43,000 on February 11, 2019, only $155,000,000 worth of put (sell) options would be available. This is because a right to buy Bitcoin at $40,000 on expiry will not be valid.
Bulls could make $320 million in profit
Based on current price action, here are the three most probable scenarios. The expiry price will determine the number of options contracts that are available for bulls (call) or bears (put) instruments on March 4. The theoretical profit is the result of an imbalance in favor of each side.
Between $42,000 to $44,000: 560 calls and 150 puts. The net result favors the call (bull) instrument. Between $44,000 and $46,000, 760 calls vs. 40 put. Bulls are favored by $320million. Between $46,000 and $47,000, there are 840 calls vs. five puts. Bulls increase their gains to $380million
This rough estimate includes the put options in bearish bets as well as the call options in neutral-to bullish trades. This oversimplification ignores complex investment strategies.
A trader might have sold a put option to gain exposure to Bitcoin at a higher price. Unfortunately, it’s not possible to accurately estimate the effect.
Related: Bitcoin is a good bet if the Fed keeps easing to avoid a slump — Analyst
Bears are more likely to throw in their towel.
To make a profit of $250 million, bitcoin bulls will need a 1% pump at $44,000. To cut down on their losses to $110 million, bears need a 4.5% drop in price from $44,800.
Bitcoin bears had their leverage short positions of $300 million liquidated recently, making it unlikely that they will be able to press the BTC price in the near term.
Despite this, bulls will likely continue to show strength and push the price up to $45,000 during March 4 options expiry.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.