Over the past two months, Bitcoin (BTC) has stuck to an ascending triangle formation, bouncing off its support and resistance lines multiple times. While this may sound positive, the price is still down 11% year-to-date. By comparison, the Bloomberg Commodity Index (BCOM) has gained 29% in the same period.
The broader commodity index benefited from price gains in crude oil, natural gas, corn, wheat and lean hogs. Meanwhile, the total cryptocurrency market capitalization was unable to break above the $2 trillion resistance level and currently stands at $1.98 trillion.
In addition to the record inflation of the last 40 years in the United States, a spending bill of 1.5 trillion dollars was approved on March 15, enough to finance the government until September. Worsening macroeconomic conditions put pressure on the supply curve, which, in turn, pushed commodity prices higher.
For these reasons, cryptocurrency traders are increasingly concerned about US Federal Reserve rate hikes expected throughout 2022 to contain inflationary pressure.
If global economies slip into recession, investors will seek protection in US Treasuries and the dollar itself, moving away from risky asset classes like cryptocurrencies.
Bulls placed their bets at $100,000 and up
Open interest for the March 25 options expiry in Bitcoin is $3.34 billion, but the actual figure will be much lower as the bulls were too bullish.
These traders might have been fooled by the short-lived rally to $45,000 on March 2, as their bets for the March 25 options expiry extend beyond $100,000.
Even Bitcoin’s recent rally above $42,000 caught bears by surprise, as only 16% of bear option bets for March 25 have been placed above this price level.
The 1.75 ratio between calls and puts shows larger bets, as open interest on calls is $2.13 billion, compared to $1.21 billion for puts. However, with Bitcoin hovering near $42,000, most bearish bets will likely be worthless.
For example, if the price of Bitcoin sustains above $42,000 at 8:00 am UTC on March 25, only $192 million of these put options will be available. This difference occurs because a right to sell Bitcoin at $40,000 is meaningless if it trades above that level at expiration.
Bulls are aiming for a $280 million gain
Below are the three most likely scenarios based on current price action. The number of option contracts available on March 25 for call (bullish) and put (bearish) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical gain:
- Between $39,000 and $42,000: 6,300 call options vs. 6,300 put options. The net result is balanced between buying (bullish) and selling (bearish) instruments.
- Between $42,000 and $44,000: 8,700 calls vs. 4,600 puts. The net result favors the bulls by $175 million.
- Between $44,000 and $45,000: 10,600 calls vs. 4,300 puts. The bulls increase their profits to 280 million dollars.
This rough estimate considers put options used on bearish bets and calls exclusively on neutral or bullish trades. Even so, this oversimplification does not take into account more complex investment strategies.
For example, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price, but unfortunately, there is no easy way to estimate this effect.
The bears will want to pin BTC below $42,000
Bitcoin bears need to push the price below $42,000 on March 25 to avoid a $175 million loss. On the other hand, at best, the bulls need to break above $44,000 to push their gains to $280 million.
Bitcoin bears have liquidated $150 million of leveraged short positions on March 22, so they should have less room to drive Bitcoin price lower. That being said, the bulls will no doubt try to defend $42,000 until the options expiration on March 25.
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