Bitcoin (BTC) price has been unable to close above $32,000 in the past fortnight and is currently down 37% year-to-date. While it may seem excessive, it doesn’t stand out among some of the biggest US-listed tech companies that have also suffered notable losses recently.
In this same 15-day period, shares of Shopify Inc. (SHOP) fell 76%, Snap Inc. (SNAP) tumbled 73%, Netflix (NFLX) dropped 70%, and Cloudflare (NET) posted a 62% negative.
Cryptocurrency investors should be less concerned about the current “bear market” considering Bitcoin’s 79% annualized volatility. However, this is clearly not the case, because Bitcoin’s “Fear and Greed Index” reached 8 out of 100 on May 17, the lowest level since March 2020.
Traders fear that worsening macroeconomic conditions will cause investors to seek refuge in the dollar and US Treasuries. Japan’s industrial production data released on May 18 showed a contraction of 1.7% year-on-year. Additionally, UK retail sales data for May 20 showed a 4.9% decline from 2021.
Financial analysts around the world blame the weakening of market conditions on the US Federal Reserve’s slow reaction to rising inflation. Thus, traders are increasingly seeking refuge outside of riskier assets, which has a negative impact on the price of Bitcoin.
The bulls made most of the bets above $40,000
The open interest for the monthly expiry of the May 27 options in Bitcoin is $1.81 billion, but the actual figure will be lower because the bulls were caught off guard, as the price of BTC has fallen 26% in the last 30 years. days.
The 1.31 ratio between calls and puts reflects the open interest of $1.03 billion in calls versus $785 million in puts. Nonetheless, 94% of the bullish bets will likely be worthless given that Bitcoin is currently trading near $30,000.
If the price of Bitcoin sustains below $31,000 on May 27, the bulls will only have $60 million of these call options. This difference occurs because there is no value in a right to buy Bitcoin at $31,000 if it trades below that level at expiration.
The bears can lock in a $390 million profit on May 27
Below are the three most likely scenarios based on the current price action. The number of option contracts available on May 27 for call and put instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical gain:
- Between $28,000 and $30,000: 800 call options vs. 14,200 put options. The net result favors the bears at $390 million.
- Between $30,000 and $32,000: 2,050 call options vs. 11,200 put options. The bears have a $250 million advantage.
- Between $32,000 and $33,000: 5,650 call options vs. 9,150 put options. The net result favors the bears at $110 million.
This gross estimate considers call options used on bull bets and put options exclusively on neutral or bear trades. Even so, this oversimplification does not take into account more complex investment strategies.
For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a specific price, but unfortunately, there is no easy way to estimate this effect.
Bitcoin bears need to keep the price below $30,000 on May 27 to pocket $390 million in monthly options expiry. On the other hand, the bulls can cut their losses if they push BTC above $32,000, up 8% from the current price of $29,700. However, judging by the bleak macroeconomic conditions, the bears seem better positioned for the May 27 expiration.
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