On Dec. 14, Bitcoin (BTC) broke above $18,000 for the first time in 34 days, marking a 16.5% gain from the $15,500 low on Nov. 21. The move followed a 3% gain in 3-day S&P 500 futures, which recaptured critical support at 4,000 points.
While the BTC price started the day in favor of the bulls, investors were eagerly awaiting the US Federal Reserve Committee’s decision on interest rates, along with comments from Fed Chairman Jerome Powell. . The subsequent 0.50% rise and Powell’s explanation of why the Fed would stick to its current policy course gave investors good reason to doubt that the BTC price would sustain its current gains until USD options expire. 370 million on December 16.
Analysts and traders expect some type of weakening in the macroeconomic tightening movement. For those unfamiliar, the Federal Reserve previously increased its balance sheet from $4.16 trillion in February 2020 to a staggering $8.9 trillion in February 2022.
Since that peak, the monetary authority has been trying to get rid of debt instruments and exchange-traded funds (ETFs), a process known as tapering. However, the previous five months resulted in a decline in assets of less than $360 billion.
Until there is clearer guidance on the economic policies of the world’s largest economy, Bitcoin traders are likely to remain skeptical of sustained price movement, regardless of direction.
The bears placed most of their bets below $16,500
Open interest for the Dec. 16 options expiration is $370 million, but the actual figure will be lower as bears were caught off guard after the move to $18,000 on Dec. 14 and $16,500, which looks unlikely given market conditions.
The call-to-put ratio of 0.94 shows a balance between open interest to buy (call) of USD 180 million against put options of USD 190 million. However, as Bitcoin approaches $18,000, most bearish bets will likely lose value.
If Bitcoin sustains above $18,000 at 8:00 am UTC on December 16, virtually none of these put options will be available. This difference occurs because the right to sell Bitcoin at $17,000 or $18,000 is worthless if BTC trades above that level at expiration.
Bulls can earn up to $155 million
Below are the four most likely scenarios based on current price action. The number of Bitcoin option contracts available on December 16 for call (bullish) and put (bearish) instruments varies, depending on the expiration price. The imbalance in favor of each side constitutes the theoretical benefit:
- Between $16,500 and $17,500: 1,400 call options vs. 1,200 put options. The net result is balanced between the call and put options.
- Between $17,500 and $18,000: 3,700 call options vs. 100 put options. The net result favors buy instruments (bullish) for USD 60 million.
- Between $18,000 and $19,000: 6,200 call options vs. 0 put options. The net result favors buy instruments (bullish) for USD 115 million.
- Between $19,000 and $19,500: 8,100 call options vs. 0 put options. The net result favors buy instruments (bullish) by USD 155 million.
This crude estimate considers put options used in bearish bets and call options exclusively in neutral to bullish trades. Even so, this simplification ignores more complex investment strategies.
For example, a trader 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.
FTX contagion continues to affect markets
During bear markets, it is easier to negatively impact the price of Bitcoin due to the tone of the news flow and its outsized effect on the crypto market.
Recent negative cryptocurrency news includes reports of a US court filing that showed an “unfair” trading advantage for Alameda Research, the market making and trading firm associated with failing exchange FTX.
The US Commodity Futures Trading Commission alleges that Alameda Research had faster trade execution times and an exemption from the exchange’s “automatic settlement risk management process.”
Before December 16, the bulls’ best-case scenario calls for a pump above $19,000 to extend their gains to $155 million. This seems unlikely considering the persistent regulatory and contagion risks. For now, it is likely that the bears can push BTC below $18,000 and avoid a bigger loss.
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