As the US Federal Reserve (FED) continues to monitor the overheating of the economy, further interest rate hikes are likely to take place to curb inflation. The unintended consequence is the increase in the cost of public debt, which creates a bullish environment for scarce assets such as commodities, the stock market and cryptocurrencies.
Bitcoin’s price rally all but extinguished bear expectations of an options expiration below $21,500 on Feb. 17, making it unlikely their bets will pay off as the deadline approaches.
The main concern for Bitcoin investors is the possibility of further shocks from regulators after the US Securities and Exchange Commission halted exchange Kraken’s staking rewards program on Feb. 9 and cracked down on it. the issuance of Binance USD (BUSD) stablecoins on February 13.
Even if the news flow remains negative, bulls can still profit on the options expiry on Friday, Feb 17, keeping BTC price above $22,500, but the tide can easily turn in favor of bears.
The bears did not expect the $22,000 level to hold
Open interest for the February 17 options expiration is $675 million, but the actual figure will be lower as bears expected price levels below $22,000. These traders were overly confident after the BTC price held above $22,500, but the tide can easily turn in favor of the bears. These traders became overconfident after Bitcoin traded below $21,500 on Feb. 13.
The 1.12 ratio between call and put options reflects the imbalance between the USD 355 million of open interest in call options and the USD 320 million in put options. If the Bitcoin price stays near $22,700 at 8:00 am UTC on February 17, only $24 million of these put options will be available.. This difference occurs because the right to sell Bitcoin at $21,000 or $22,000 is worthless if BTC trades above that level at expiration.
Bulls target $23,000 to lock in a $155 million profit
Below are the four most likely scenarios based on current price action. The number of option contracts available on February 17 for buy (bullish) and sell (bearish) instruments varies depending on the expiration price. The imbalance that favors each side constitutes the theoretical benefit:
- Between USD 21,000 and USD 22,000: 700 purchase options (calls) vs. 5,500 sale options (puts). The net result favors put instruments (bearish) by USD 100 million.
- Between USD 22,000 and USD 22,500: 1,800 purchase options (calls) vs. 1,500 put options. The net result is balanced between bears and bulls.
- Between USD 22,500 and USD 23,000: 3,800 purchase options (calls) vs. 1,100 put options. The net result favors call instruments (bullish) for USD 60 million.
- Between USD 23,000 and USD 24,000: 6,900 purchase options (calls) vs. 200 put options. The net result favors call instruments (bullish) by USD 155 million.
This rough estimate considers call options used in bullish bets and put options exclusively in trades between neutral and bearish. Even so, this oversimplification does not take into account more complex investment strategies.
For example, an investor could have sold a call option, thereby gaining negative exposure to Bitcoin above a specified price, but unfortunately there is no easy way to estimate this effect.
Bears could benefit from the impact of regulation
Bulls need the price to break above $23,000 on February 17 to lock in a potential profit of $155 million. On the other hand, at best, the bears need a 3.5% drop below $22,000 to maximize their gains.
Given the negative pressure from regulators, the bears have a good chance of turning the tables and avoiding a loss of $60 million or more on February 17.
More importantly, looking at a longer time frame, there is little room for the Fed to rein in the economy without spiraling out of control on debt interest payments.
Friday will be an interesting show of strength between the short-term impact of a hostile cryptocurrency regulatory environment versus the long-term benefits of Bitcoin’s scarcity and censorship resistance.
Bitcoin (BTC) price gained 6.3% just two days after hitting $21,370 on Feb. 13, which was the lowest level seen in over three weeks.. The price recovery can be explained in part by the US Consumer Price Index data for February 14, which shows a 6.4% increase in inflation year-over-year in January.
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