Bitcoin (BTC) crashed below $16,000 on Nov. 9, sending the price to its lowest level in two years. The 2-day correction totaled a 27% downtrend and eliminated $352 million in long (buy) leveraged futures contracts.
To date, the price of Bitcoin is down 65% by 2022, but it is essential to compare its price action to the world’s largest tech companies. For example, Meta Platforms (META) is down 70% year to date, and Snap Inc. (SNAP) is down 80%. Also, CloudFare (NET) lost 71% in 2022, followed by Roblox Corporation (RBLX) and Snapchat (SNAP), both with a 70% drop.
Inflationary pressure and fears of a global recession have driven investors away from riskier assets. This protective move has caused the 5-year US Treasury bond yield to reach 4.33% in early November, its highest level in 15 years. Investors are demanding a higher premium to hold government debt, signaling a lack of confidence in the central bank’s ability to curb inflation.
The contagion risks of FTX and the insolvency of Alameda Research are the most pressing issues. The trading group managed multiple cryptocurrency project funds and was the second largest trading exchange for Bitcoin derivatives.
The bulls were too optimistic and will suffer the consequences
Open interest for the Nov 11 options expiry is $710 million, but the actual figure will be lower as the bulls were not prepared for prices below $19,000. These traders were overconfident after Bitcoin hovered above $20,000 for almost two weeks.
The call-to-put ratio of 0.83 reflects the imbalance between $320 million open call interest and $390 million put options. Bitcoin is currently sitting near $17,500, which means that most bullish bets will likely lose their value.
If the price of Bitcoin remains below $18,000 at 8:00 am UTC on November 11, only $45 million of these call options will be available. This difference occurs because the right to buy Bitcoin at $18,000 or $19,000 is worthless if BTC trades below that level at expiration.
The bears target below $17,000 to lock in a $200 million gain
Below are the three most likely scenarios based on the current price action. The number of option contracts available on November 11 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance in favor of each side constitutes the theoretical profit:
- Between USD 16,000 and USD 18,000: 1,300 call options vs. 12,900 put options. The bears dominate, with a profit of 200 million dollars.
- Between USD 18,000 and USD 19,000: 2,500 call options vs. 10,200 put options. The net result favors put (bear) instruments by USD 140 million.
- Between USD 19,000 and USD 20,000: 3,600 call options vs. 5,900 put options. The net result favors buying instruments (bearish) by USD 40 million.
This crude estimate considers put options used on bearish bets and call options exclusively on neutral to bullish trades. Still, this simplification ignores 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.
Bulls probably have less room to support the price
Bitcoin bulls need to push the price above $19,000 on Friday to avoid a possible $140 million loss. On the other hand, the bears’ best case scenario calls for a slight push below $17,000 to maximize their profits.
Bitcoin bulls just liquidated $352 million leveraged long positions in two days, so they may need less margin to support the price. In other words, the bears have an advantage to pin BTC below $17,000 ahead of the weekly options expiry.
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