Bitcoin (BTC) bulls turned things around for the March 4 options expiry, following a 14% rally on Feb 28. Holding the price above $43,000 confirms a decoupling from traditional markets. For example, the MSCI Emerging Markets Equities Index is down 3.5% in five days, while the US Russell 2000 Small-Capitalization Index has gained 0.9%.
Investors are increasingly concerned about the ramifications of the US Federal Reserve’s rate hikes planned throughout 2022. As a result, in the past 30 days, some big names have taken a hit. . For example, Paypal (PYPL) is down 38%, META has corrected 34%, and Shopify (SHOP) has lost 31.5%.
Inflation data of 7.5% of the US consumer price index, the highest in the last 40 years, caused investors to take profits from riskier assets and the dollar index (DXY) reached its highest level in 20 months, at 97.6. The DXY measures the strength of the dollar against a basket of major foreign national currencies and rises as investors seek refuge in the US currency.
Bitcoin is high risk, but its price seems to be discounted
Bitcoin’s recent strength surprised most investors, as its correlation against the Nasdaq Composite Index reached 73% on February 20, approaching a 2020 five-year high of 74%.
Call and put option instruments are evenly matched for the March 4 options expiry, but bears were caught off guard after Bitcoin price stabilized above $43,000 this week .
A broader view using the ratio of calls and puts shows a balance between $450 million of open interest in calls versus $440 million of puts. However, the 1.02 indicator between calls and puts is misleading because most bearish bets will be worthless.
For example, if the price of Bitcoin sustains above $43,000 at 8:00 a.m. UTC on March 4, only $155 million of those puts will come into play. This difference occurs because there is no point in a right to sell Bitcoin for $40,000 if it trades above that level at expiration.
Bulls could pocket a $320 million profit
Here are the three most likely scenarios based on current price action. The number of option contracts available on March 4 for bullish (call) and bearish (put) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical gain:
- Between $42,000 and $44,000: 560 call options vs. 150 put options. The net result is USD 175 million in favor of the purchase instruments (bullish).
- Between $44,000 and $46,000: 760 call options vs. 40 put options. The net result favors the bulls at $320 million.
- Between $46,000 and $47,000: 840 call options versus 5 put options. The bulls increase their profits to $380 million.
This gross estimate considers put options used on bearish bets and calls exclusively on neutral or bullish trades. Even so, this oversimplification does not take into account more complex investment strategies.
For example, someone could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price. But unfortunately, there is no easy way to estimate this effect.
Bears are likely to throw in the towel
Bitcoin bulls need a 1% rally above $44,000 to make a $250 million profit on March 4. On the other hand, the bears’ best-case scenario calls for a 4.5% price decline from the current $44,800 to cut their losses to $110 million.
Bitcoin bears recently suffered a sell-off of $300 million in leveraged short positions, so they are unlikely to have the necessary backing to pressure BTC price in the short term.
That said, the bulls are likely to continue to show their strength by pushing the price to $45,000 and higher during the options expiry on March 4.
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