Bitcoin (BTC) has been stuck below the $18,600 resistance for the past 19 days and while the bears managed to break the $16,000 support on Nov. 21, the 8% range is pretty tight for a class of assets with an annualized volatility of 60%.
This gives investors several reasons to doubt that the BTC price will maintain its current gains ahead of the expiration of $430 million in options contracts on December 2.
Investors still don’t know if $15,500 was the bottom of Bitcoin and the fallout from the demise of FTX and Alameda Research continues to loom. The latest victim of the contagion has been Auros Global, an algorithmic trading and market making company, which has defaulted on a DeFi loan.
Regulatory uncertainty also continues to limit the rise of Bitcoin’s price, especially after US Senator Elizabeth Warren reinforced the importance of blocking direct exposure of insured financial institutions “to the highly speculative, leveraged and vulnerable activity” of the crypto space.
Given these risks, it seems essential that the bulls defend the $17,000 mark ahead of the December 2 options expiration.
The bears placed most of their bets below $16,500
Open interest for the December 2 options expiration is $430 million, but the actual number will be lower as the bears were overly optimistic. These traders completely missed the mark by placing bets to the downside between $12,000 and $15,000 after Bitcoin lost support at $16,000 on Nov. 21.
The 0.88 ratio between call and put options shows the dominance of $230 million of open interest in put options versus $200 million in call options. However, with Bitcoin sitting near $17,000, most bearish bets will probably be worth nothing.
If the Bitcoin price sustains above $17,000 at 8:00 am UTC on December 2, only $4 million of these put options will be available. This difference is because a Bitcoin right to sell at $16,000 or $17,000 is worthless if the BTC price trades above that level at expiration.
The bulls still have a small chance
Below are the four most likely scenarios based on current price action. The number of Bitcoin option contracts available on December 2 for the buy (bullish) and sell (bearish) instruments varies depending on the expiration price. The imbalance that favors each side constitutes the theoretical gain:
- Between $15,500 and $16,500: 600 call options vs. 3,100 put options. The net result favors sales instruments (downwards) by USD 40 million.
- Between $16,500 and $17,000: 1,700 call options vs. 1,400 put options. The net result is balanced between call and put options.
- Between $17,000 and $18,000: 6,200 call options vs. 100 put options. The net result favors buy instruments (bullish) by USD 110 million.
- Between $18,000 and $19,000: 8,600 call options vs. 0 put options. The net result favors buy instruments (bullish) by USD 160 million.
This gross estimate considers put options used in bearish bets and call options exclusively in 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 specified price, but unfortunately, there is no easy way to estimate this effect.
Pending regulation and the risk of contagion contribute to increasing investor fear
During bear markets, it is easier to negatively impact the price of Bitcoin due to the large effect that negative news has on the cryptocurrency market.
For example, Binance moved $2 billion worth of Bitcoin on November 28, sparking community concern.
The transaction raised investor eyebrows because Binance CEO Changpeng Zhao had previously stated that it is bad news when exchanges move large amounts of cryptocurrency to prove their wallet address. Consequently, the bears are likely to be able to push the price of Bitcoin below $17,000 and avoid a possible loss of $110 million.
More importantly, the bulls’ best-case scenario calls for a rally above $18,000 to extend their gains to $160 million, quite unlikely given lingering regulatory and contagion risks. So for now, the bears appear to be in control of the expiry on Friday, despite being overconfident.
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