Bitcoin investor sentiment improved after signs of easing inflationary pressure suggested the US Federal Reserve may soon back away from its interest rate hike and quantitative tightening. Commonly known as a pivot, the change in trend would benefit risky assets like cryptocurrencies.
On January 22, China-based peer-to-peer trading of USD Coin (USDC) hit a 3.5% premium against the US dollar, signaling moderate FOMO from retail traders. This level is the highest in more than 6 months, suggesting that excessive demand for cryptocurrency purchases has pushed the indicator above its fair value.
The all-time high in Bitcoin’s 7-day hash rate — an estimate of the processing power dedicated to mining — also supported the bullish momentum. The indicator peaked at 276.9 exo-hash per second (EH/s) on Jan. 19, indicating a reversal of recent weakness caused by miners’ financial difficulties.
Despite the efforts of bears, Bitcoin has been trading above $20,000 since Jan. 14, a move that explains why the expiration of $1.48 billion worth of monthly Bitcoin options will greatly benefit bulls. despite the recent failure to break the $23,200 resistance.
Bulls were overly bullish, but remain well positioned
Bitcoin’s latest rally on Jan 20 caught the bears by surprise, since only 6% of the put (sell) options for the monthly expiration have been placed above USD 22,000. Therefore, the bulls are better positioned even though they have placed almost 40% of their call options at $23,000 or higher.
A broader view using the 1.15 ratio between put and call options shows more bullish bets, as the open interest for call options is $790 million, versus $680 million for put options. Nevertheless, most bearish bets are likely to lose value as Bitcoin is up 36% in January.
If the Bitcoin price sustains above $22,000 at 8:00 am UTC on January 27, only $38 million of these put options will remain available. This difference occurs because the right to sell Bitcoin at USD 21,000 or USD 22,000 if it trades higher at expiration is of no use.
Bears could lock in a $595 million profit
Below are the four most likely scenarios based on current price action. The number of option contracts available on January 27 for buy (bullish) and sell (bearish) instruments varies depending on the expiration price. The imbalance that favors each side constitutes the theoretical benefit:
- Between USD 20,000 and USD 21,000: 12,800 purchase options (calls) vs. 7,100 put options. The net result favors the bulls by $115 million.
- Between USD 21,000 and USD 22,000: 17,600 purchase options (calls) vs. 2,800 put options. The net result favors the bulls by USD 320 million.
- Between USD 22,000 and USD 23,000: 21,200 purchase options (calls) vs. 1,100 put options. The bulls remain in control, gaining $455 million.
- Between USD 23,000 and USD 24,000: 25,300 purchase options (calls) vs. 0 puts. The bulls completely dominate the expiration, accumulating $595 million.
This rough estimate considers call options used in bullish bets and put options exclusively in trades between neutral and bearish. Even so, this oversimplification does not take into account more complex investment strategies.
Bitcoin bears need to push the price below $21,000 on January 27 to greatly cut their losses. However, Bitcoin bears have recently liquidated $335 million worth of leveraged short futures positions, so they likely have less room to wield their power in the near term.
Consequently, the most likely scenario for BTC’s January monthly options expiration is the $22,000 level or higher, providing a decent win for the bulls.
Bitcoin (BTC) price faced fierce resistance at $23,000 after an 11% rally on Jan. 20, but it was enough to trigger liquidations of $335 million in short positions via futures contracts. The 36% year-to-date rally to $22,500 made bears ill-prepared for the $1.48 billion monthly option expiration on January 27.
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