Bitcoin (BTC) price lost steam after a failed break of the $27,500 resistance on May 15, putting the bears in a better position heading into the May 19 expiration. The flow of regulatory news is likely to have played a key role in dampening investors’ risk appetite as governments seek greater control over the sector.
In a memo circulated to committee members, Democrats in the US legislature sought to consolidate the SEC’s authority over cryptocurrencies. The document was made public on May 10 and included the argument that almost all digital assets constitute securities. What’s more, in Gensler’s opinion, even network nodes violate securities laws.
The 17th of May, the UK Treasury Committee “strongly recommended” regulating cryptocurrency retail and investment activity such as gambling, in accordance with the principle of “same risk, same regulatory outcome”. Treasury Committee Chair Harriett Baldwin described Bitcoin and Ether as responsible for two-thirds of the total crypto asset market capitalization, both of which are “unbacked.”
The expiration of $735 million worth of Bitcoin weekly options on May 19 could play a decisive role in determining whether the price will capitulate by falling below $26,000.
Bitcoin could be bottoming out in the short term
Bitcoin bears will try to take advantage of the negative regulatory environment and uncertainty caused by the risk of the US Treasury “running out of funds” as the debt ceiling approaches. Such a pessimistic scenario partly explains why some Bitcoin traders decided to reduce their exposure in recent weeks.
Bitcoin price was down 6.6% in the 36 hours leading up to the latest BTC options expiration on May 12, marking a short-term low on the 4-hour chart. More importantly, the subsequent 3-day rally towards $27,500 was short-lived, favoring the bearish momentum thesis.
Bitcoin Options Data Shows Bulls Were Overly Bullish
Open interest for the May 19 options expiration is $735 million, but the actual figure will be lower as bulls concentrated their bets above $28,000. These traders were overly bullish after the Bitcoin price rallied 7% on May 12-15, testing the resistance at $27,500.
The 0.42 call to put ratio reflects the imbalance between the $424 million of open interest in call options and the $312 million in put options. However, if the Bitcoin price stays near $26,500 at 8:00 am UTC on May 19, only $30 million of these call options will be available. This difference is because the right to buy Bitcoin at $27,000 or $28,000 is worthless if BTC trades below that level at expiration.
Bitcoin Bulls Target $27,000 to Even the Scales
Below are the four most likely scenarios based on current price action. The number of option contracts available on May 19 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 25,000 and USD 26,000: 100 purchase options (calls) vs. 7,800 sale options (puts). Bears in full control, earning $190 million.
- Between USD 26,000 and USD 27,000: 1,100 purchase options (calls) vs. 4,300 put options. The net result favors put instruments (sale) by USD 80 million.
- Between USD 27,000 and USD 28,000: 2,300 purchase options (calls) vs. 2,000 put options. The result is balanced between call and put options.
- Between USD 28,000 and USD 29,000: 5,700 purchase options (calls) vs. 700 sale options (puts). The net result favors the call instruments (bullish) by USD 140 million.
This rough estimate considers put options used in bearish bets and call options exclusively in neutral to bullish trades. Even so, this oversimplification does not take into account more complex investment strategies.
For example, a trader could have sold a call option, thereby gaining negative exposure to Bitcoin above a specified price. Unfortunately, there is no easy way to estimate this effect.
Even so, Traders should be cautious as bears are currently in a better position for the weekly options expiration on Friday, favoring negative price moves.. Thus, an eventual capitulation below USD 26,000 should not be ruled out.
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