The daily closing price of Bitcoin (BTC), fluctuated between $35,000.50 and $47,000.550 over the past three months. This is a range of 35.7%. This isn’t unusual considering the 68% annualized historical volatility of Bitcoin.
Coinbase: Bitcoin/USD 1-day chart Source: TradingView
After the April 11 plunge below $40,000, relief rallies followed the U.S. Consumer Price Index report (CPI), which announced 8.5% March, the highest level since 1981. The CPI rose to 7% in the United Kingdom, which is a 30-year record.
Cryptocurrency traders are becoming more concerned about how the U.S. Federal Reserve rate increases expected to be contained inflationary pressures throughout 2022. Investors will likely abandon risk-on assets such as cryptocurrencies if the global economy enters recession.
Leverage traders were also affected by the Bitcoin price correction. The total liquidations at derivatives exchanges reached $428 millions.
Bulls bet at $50,000 or more
Open interest in Bitcoin’s April 15 options expiry is $615 million. However, this number will likely be lower because bulls were too optimistic. The traders may have been deceived by the temporary pump to $48,000 on March 28, as their April 15 options expiry bets exceed $50,000.
Bulls were taken by surprise when Bitcoin dropped below $41,000. Only 18% of call (buy) options for the April 15 date have been placed below this price.
For April 15, 2015, Bitcoin options have an aggregated open interest. Source: CoinGlass
The 1.21 ratio of call-to-put shows that the $335million call (buy) open interests is dominant over the $280 million put options. However, Bitcoin is close to $41,000 so most bullish bets will become meaningless.
These call options will not be available if Bitcoin’s price is below $42,000 on April 15th at 8:00 UTC. This is because a right of purchase Bitcoin at $42,000 on expiry is worthless if BTC trades below this level.
To balance the scales, bulls target $43,000
Based on current price action, the following are the most likely scenarios. The expiry price will determine the number of options contracts that are available for call (bull) or put (bear), depending on which instrument is being traded. The theoretical profit is the result of an imbalance in favor of each side.
Between $39,000 to $41,000: 950 calls against 5,400 puts. The net result favors bear (or put) instruments by $180million. Between $41,000 and $42,000, 1,500 calls vs. 3950 puts. The net result favors bears with $100 million. Between $42,000 and $43,000, 1,850 calls vs. 3300 puts. The put (bear), instruments are favored by $60 million. Between $43,000 and $45,000, there are 2,700 calls and 2,800 puts. The net result is a balance between put (sell) and call (buy).
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 above a certain price. Unfortunately, it’s not possible to quantify this effect.
Related: Mark Yusko discusses the real problem in Fed policy and why Bitcoin is important
Bears will attempt to keep BTC below $41,000
To secure $180 million in profits, bitcoin bears must keep the price below $41,000 by April 15. To neutralize any impact, however, the bulls need to push the price above $43,000.
The $180 million worth of leveraged long positions held by Bitcoin bulls were liquidated on April 10, and April 11, respectively. This means that they have less room than necessary to push the price higher. Bears will try to keep BTC below $41,000 before the April 15 options expire.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.