Bitcoin (BTC) saw a 16.5% correction between August 15 and 19 as it returned to support at $20,800. Although the drop is surprising, in reality a price difference of $4,050 is relatively insignificant, especially considering Bitcoin’s 72% annualized volatility.
Currently, the volatility of the S&P 500 stands at 31%, which is significantly lower, although the index traded 9.1% lower between June 8 and 13. So comparatively, the index of major US public companies faced a sharper move adjusted for historical risk metrics.
Earlier this week, crypto investors’ stance worsened after weakening Chinese property markets forced the central bank to cut its prime rate on five-year loans on Aug. 21. Additionally, a strategist at investment bank Goldman Sachs claimed that inflationary pressure would force the US Federal Reserve to further tighten its belt, negatively affecting the S&P 500.
Regardless of the correlation between stocks and Bitcoin, which is currently 80/100, investors tend to take refuge in the US dollar and inflation-protective bonds when they fear a crisis or market crash. This move is known as “flight to quality” and tends to add selling pressure to all risk markets, including cryptocurrencies.
Despite the efforts of the bears, Bitcoin has not been able to break below the $20,800 support. This move explains why the $1 billion monthly Bitcoin options expiry on August 26 could benefit the bulls despite the recent 16.5% 5-day loss.
Most of the bullish bets are above $22,000
Bitcoin’s sharp correction after failing to break the $25,000 resistance on Aug. 15 surprised bulls as only 12% of call options for monthly expiry have been placed above $22,000. Therefore, Bitcoin bears are better positioned even though they have placed fewer bets.
A broader view using the 1.25 ratio between calls and puts shows more bullish bets because open interest for calls is $560 million vs. $450 million for puts. However, as Bitcoin is currently below $22,000, most of the bullish bets will likely be worthless.
For example, if the price of Bitcoin stays below $22,000 at 8:00 am UTC on August 26, only $34 million of these put options will be available. This difference occurs because the right to sell Bitcoin for less than $22,000 if it trades above that level at expiration is of no use.
Bulls could pocket $160 million in profit
Below are the four most likely scenarios based on current price action. The number of option contracts available on August 26 for call (bullish) and put (bearish) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
- Between $20,000 and $21,000: 1,100 call options vs. 8,200 put options. The net result favors the bears at $140 million.
- Between $21,000 and $22,000: 1,600 call options vs. 6,350 put options. The net result favors the bears by $100 million.
- Between $22,000 and $24,000: 5,000 call options vs. 4,700 put options. The net result is balanced between bulls and bears.
- Between $24,000 and $25,000: 7,700 call options vs. 1,000 put options. The net result favors the bulls by $160 million.
This gross estimate considers that call options are used in bullish bets and put options exclusively in neutral or bearish operations. Even so, this oversimplification does not take into account more complex investment strategies.
Holding the $20,800 mark is key, especially after the bulls were liquidated in the futures market
Bitcoin bulls need to push the price above $22,000 on Aug 26 to balance the scales and avoid a possible $140 million loss. However, Bitcoin bulls have liquidated $210 million worth of long leveraged futures positions on Aug. 18, so they are less inclined to push the price higher in the short term.
With that being said, the most likely scenario for Aug 26 is the $22,000 to $24,000 range, which provides a balanced outcome between the bulls and the bears.
If the bears show some strength and BTC loses the critical $20,800 support, the $140 million loss on the monthly expiry will be the least of their problems. Furthermore, the move would invalidate the previous low of $20,800 from July 26, effectively breaking a 7-week long uptrend.
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