Bitcoin bulls to defend $40K leading into Friday’s $760M options expiry

Bitcoin (BTC), which has been on a slight upward trend for the past two months, bounced multiple times from its support over the past few months.

Although this may sound good, Bitcoin’s year-to-date performance is still a disappointing negative 14%. The Bloomberg Commodity Index (BCOM), on the other hand, gained 2% during the same period.

Chart of Bitcoin/USD 1-day candles Source: TradingView

Price increases in crude oil and natural gas, corn, lean hogs, and gold benefited the wider commodity index. Worsening macroeconomic conditions pushed the supply curve to a lower level, which in turn shifted equilibrium prices toward a higher level.

The United States also approved a $1.5 billion spending bill on March 15, which funds the government until September. The legislation was signed by President Joe Biden, which prevents a shutdown of government but adds to the pressure on the U.S. National Debt, currently at more than $30.3 trillion.

However, crypto traders are becoming more concerned about U.S. Federal Reserve rate increases expected to continue through 2022 in an effort to limit inflationary pressure.

Investors made profits on more risky assets. The U.S. Dollar Index (DXY), which was at its highest in 21 months, reached 99.2 on March 11. The index measures the strength of the dollar against a basket top foreign currencies.

Bearish bets tend to be below $40,000

Bears were taken aback by Bitcoin’s rebound above $40,000 on March 26, as only 7% bearish option bets for the March 18 period have been placed at this price.

Bulls may have been deceived by the recent $45,000 resistance testing on March 1. Their bets for March 18’s $760 Million options expire at $65,000.

For March 18, 2018, Bitcoin options have an aggregated open interest of $38 Source: CoinGlass

The 1.26 call-to–put ratio gives a wider view. This is because the open interest in call (buy) stands at $425,000,000, while the put (sell), options stand at $335 million. However, Bitcoin has risen above $40,000 so bearish bets are likely to become meaningless.

If Bitcoin’s price is above $40,000 by 8:00 UTC on March 18, then only $24 million worth (sell) options will remain. This is because a right to buy Bitcoin at $40,000 on expiry will not be valid if it trades above this level.

Bulls could make $320 million in profit

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.

1,700 calls vs. 1,300 put. The net result is balanced between call (bull) or put (bear), instruments. Between $40,000 and $41,000, 3,200 calls vs. 600 lets. Bulls have a net advantage of $105 million. Between $41,000 and $42,000, 4,200 calls vs. 300 put. Bulls increase their gains to $160million

This rough estimate includes 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, it’s not possible to accurately estimate the effect.

Related: Bitcoin risk final ‘bear-market capitulation’ as wealthy investors continue BTC saleoff — analyst

Bears are motivated to lower Bitcoin prices

To avoid a loss of $105 million, bitcoin bears must keep the price below $40,000 by March 18. To increase their gains to $160million, bulls need to push the price above $41,000.

The $98 million worth of leveraged long positions held by Bitcoin bulls was liquidated on March 16th, so there is less incentive to push the price up in the short-term. Bulls will probably defend $40,000 support through March 18, when the March 18 options are over.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.