Until April 25, Bitcoin (BTC) bulls had been defending the $38,000 level, but the bulls were caught off guard by the recent drop. When Bitcoin crashed from $46,700 to $37,700 between April 5 and 26, most bullish bets on the upcoming $1.96 billion monthly options expiration lost their value.
Regulatory concerns remain a threat to Bitcoin and on April 26 the New York State Assembly passed a bill banning new proof-of-work (PoW) cryptocurrency carbon mining facilities in the state. . Fortunately for Bitcoin, mining equipment is portable so there is no real risk to the security of the Bitcoin network, but the constant threat of anti-crypto legislation may have an impact on the price.
Geopolitical tension in Europe has also led investors to avoid riskier assets, with many seeking protection in US dollar-denominated assets. CNBC reported that the impact of Russian state-owned energy company Gazprom’s decision to cut off natural gas supplies to Poland and Bulgaria raised concerns about a deeper economic slowdown in the eurozone region.
Investors are also obsessed with the possible US Federal Reserve rate hike of 250 basis points expected throughout 2022. The move is intended to contain inflationary pressure, but could push global economies into recession and this is another reason why investors are avoiding highly volatile assets like cryptocurrencies.
Bulls did not expect prices below $40,000
The open interest for the April 29 options expiry in Bitcoin is $2 billion, but the actual figure will be much lower as the bulls did not expect the price of BTC to drop below $40,000.
These traders might have been misled as Bitcoin hovered above $45,000 between March 27 and April 6, making huge bets for the monthly expiry of options above $50,000.
The call-to-put ratio of 1.55 shows more sizable bullish bets, as open call (buy) interest stands at $1.19bn vs. $770m for puts. However, as Bitcoin nears $39,000, most bullish bets will likely lose their value.
For example, if the price of Bitcoin stays below $40,000 at 8:00 am UTC on April 29, only $60 million in these calls will be available. This difference occurs because there is no use having the right to buy Bitcoin at $40,000 if it trades below that level at expiration.
The bulls need $41,000 to balance the scales
Below are the three most likely scenarios based on current price action. The number of option contracts available on April 29 for call and put instruments varies depending on the expiry price. The imbalance in favor of each side constitutes the theoretical profit:
- Between USD 37,000 and USD 39,000: 600 purchase options (calls) vs. 9,800 put options. The net result favors put instruments (bearish) by USD 350 million.
- Between USD 39,000 and USD 40,000: 1,500 purchase options (calls) vs. 8,300 put options. The net result favors the bears by $260 million.
- Between USD 40,000 and USD 41,000: 3,400 purchase options (calls) vs. 5,600 put options. The bears remain better positioned by $90 million.
- Between USD 41,000 and USD 42,000: 4,100 purchase options (calls) vs. 4,700 put options. favors put instruments (bearish) by USD 30 million.
This crude estimate considers put options used on bearish bets and call options exclusively on neutral to bullish 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.
The bears point to a profit of $ 350 million
Bitcoin bears need to push the price below $39,000 on Apr 29 to lock in a $350 million gain. On the other hand, the bulls’ best-case scenario calls for a 6% price increase above $41,000 to cut their losses to $30 million.
Bitcoin bulls liquidated $330 million leveraged long positions in the last seven days, so they may need less leeway to push Bitcoin price higher. With that in mind, the bears are likely to try to suppress BTC below $39,000 until the options expiration on April 29.
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