For the past nine days, the daily closing price of Bitcoin (BTC) fluctuated in a narrow range between $28,700 and $31,300. The May 12 crash of TerraUSD (UST), previously the third-largest stablecoin by market cap, negatively affected investor sentiment and the path for Bitcoin price recovery appears cloudy after the stock index composite Nasdaq will plummet 4.7% on May 18.
Disappointing quarterly results from major US retailers are raising recession fears and on May 18, Target (TG) shares fell 25% while Walmart (WMT) shares fell 17% in two days. The prospect of an economic slowdown pushed the S&P 500 Index to the brink of bear market territory, a 20% contraction from its all-time high.
Also, the recent cryptocurrency price drop was costly to take advantage of (long) buyers. According to Coinglass, aggregate settlements reached $457 million in derivatives exchanges between May 15 and May 18.
Bulls placed bets at $32,000 and above
Open interest for the May 20 options expiry is $640m, but the actual figure will be much lower as the bulls were too bullish. Bitcoin’s recent drop below $32,000 caught buyers by surprise and only 20% of May 20 call options were placed below that price level.
The call-to-put ratio of 0.66 reflects the dominance of $385 million put open interest over $255 million call options. However, as Bitcoin approaches $30,000, most put bets are likely to lose value, reducing the bears’ advantage.
If the price of Bitcoin sustains above $29,000 at 8:00 am UTC on May 20, only $160 million of these put options will be available. This difference occurs because the right to sell Bitcoin at $30,000 is worthless if BTC trades above that level at expiration.
BTC below $29,000 would benefit bears
Below are the three most likely scenarios based on the current price action. The number of option contracts available on May 20 for call (bull) and put (bear) instruments varies depending on the expiry price. The imbalance in favor of each side constitutes the theoretical profit:
- Between USD 28,000 and USD 29,000: 300 call options versus 7,100 put options. The net result favors buying instruments (bearish) by USD 190 million.
- Between USD 29,000 and USD 30,000: 600 call options vs. 5,550 put options. The net result favors the bears by $140 million.
- Between USD 30,000 and USD 32,000: 1,750 call options vs. 3,700 put options. The net result favors buying instruments (bearish) by USD 60 million.
This crude 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.
Bulls have little to gain in the short term
Bitcoin bears need to push the price below $29,000 on May 20 to lock in a $190 million profit. On the other hand, the bulls’ best case scenario calls for a push above $30,000 to minimize damage.
Considering that Bitcoin bulls have liquidated $457 million in leveraged long positions between May 15 and May 18, they should have less room to drive the price higher. Therefore, the bears will try to suppress BTC below $29,000 ahead of the May 20 options expiry and this decreases the chances of a near-term price recovery.
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