Some analysts argue that Bitcoin (BTC) rallied too fast too early and the weakness we see on April 7 is a result of that. Currently, a new variant of COVID-19 has caused the Chinese government to implement severe restrictions in Shanghai and other major cities, and persistent regulatory concerns continue to weigh on sentiment within the cryptocurrency sector.
Another worrying development is the European Parliament’s Economic and Monetary Affairs Committee (ECON) vote on March 31 to update regulations regarding the ability of exchanges to deal with non-custodial cryptocurrency wallets.
Should the draft regulation reach the legislative stage in the coming months, it would impose strict disclosure requirements on transactions on crypto exchanges in the European Union.
Not everything has been negative for Bitcoin as the cost of moving Bitcoin through the network has hit decade lows, according to research by Galaxy Digital. The average Bitcoin transaction fee has plummeted to 0.00001292 Bitcoin ($0.59) in 2022, the lowest in 11 years.
According to Glassnode on-chain analyst James Check, “batching and Segwit are definitely part of the mix,” because they increase the number of transactions that fit in a block.
The bulls were caught by surprise
Bitcoin’s drop below $45,000 on April 6th caught the bulls by surprise because only 8% of call option bets for April 8th have been placed below this price level.
The bulls might have been fooled by the recent attempt to break above $48,000 on March 29 and this is showing in their bets for the $610 million April 8 option expiry going as high as $65,000.
A broader view using the 0.97 call-to-put ratio shows balanced bets between the $300 million open interest for calls and the $310 million for puts. Now that Bitcoin is back below $45,000, most of these bullish bets will lose their value.
For example, if the price of Bitcoin remains below $45,000 at 8:00 am UTC on April 8, only $24 million of these call options will be available. This difference occurs because there is no use having the right to buy Bitcoin at $50,000 if it trades below this level at expiration.
The bears aim for a profit of 145 million dollars
Listed below are the four most likely scenarios based on current price action. The number of option contracts available on April 8 for call (bullish) and put (bearish) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
- Between USD 42,000 and USD 44,000: 250 call options vs. 3,650 put options. The net result favors purchase instruments (bearish) by USD 145 million.
- Between USD 44,000 and USD 45,000: 550 call options vs. 2,800 put options. The net result favors the bears by $100 million.
- Between USD 45,000 and USD 46,000: 700 call options versus 2,150 put options. The net result favors the bears by $60 million.
- Between $46,000 and $47,000: 1,800 call options vs. 1,500 put options. The net result is balanced between call and put options.
This crude estimate sees call options used on bullish bets and put options exclusively on neutral to bearish trades. Still, 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 specific price, but unfortunately, there is no easy way to estimate this effect.
Bears have incentives to suppress Bitcoin price
Bitcoin bears need to push the price below $44,000 on April 8 to lock in a $145 million profit. On the other hand, the bulls’ best case scenario calls for a 4.3% gain from the current $44,200 to $46,000 zone to balance the scales.
Bitcoin bulls had $65 million in leveraged long positions liquidated on April 6, so they likely have fewer resources to drive the price higher in the short term. That being said, the bears are likely to try to drop BTC below $45,000 ahead of the April 8 options expiry.
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