For the past three months, Bitcoin (BTC) daily closing price has fluctuated between $35,050 and $47,550, a range of 35.7%. While it may seem like an exaggeration, it’s not uncommon, especially given BTC’s historical annualized volatility of 68%.
Bitcoin/USD 1-day chart at Coinbase. Source: TradingView
The relief rally, which came after the April 11 drop below $40,000, followed the US consumer price index (CPI) report which announced 8.5% for March, the highest reading since 1981. Meanwhile, the UK CPI jumped to 7%, ie 30, an -year high.
For these reasons, cryptocurrency traders are increasingly concerned about whether the Federal Reserve’s expected rate hikes throughout 2022 can stem inflationary pressures. When the global economy enters a recession, investors are likely to steer away from risky asset classes like cryptocurrencies.
Additionally, the bitcoin price correction was costly for leveraged traders as total liquidations on derivatives exchanges reached $428 million.
Bulls placed their bets at $50,000 and up
The open interest for April 15 options expiration in Bitcoin is $615 million, but the actual number will be much lower as bulls have been overly optimistic. These traders may have been fooled by the short-lived pump to $48,000 on March 28th because their bets for options expiration on April 15th are above $50,000.
Bitcoin’s recent drop below $41,000 surprised the bulls and only 18% of April 15 call (buy) options were placed below this price level.
Bitcoin Options Aggregate Open Interest for April 15th. Source: CoinGlass
The call-to-put ratio of 1.21 shows the dominance of the $335 million call (call) options over the $280 million put (put) options. However, with Bitcoin near $41,000, most bullish bets are likely to become worthless.
If the price of Bitcoin stays below $42,000 at 8:00 UTC on April 15, only $62 million worth of these call options will be available. This difference arises because a right to buy Bitcoin at $42,000 is worthless if BTC is trading below that level at expiry.
Bulls target $43,000 to balance the scales
Below are the four most likely scenarios based on current price action. The number of option contracts available on April 15 for call (bull) and put (bear) instruments varies by expiry price. The imbalance in favor of each side represents the theoretical gain:
- Between $39,000 and $41,000: 950 calls vs. 5,400 puts. The net result favors put (bear) instruments by $180 million.
- Between $41,000 and $42,000: 1,500 calls vs. 3,950 puts. The net result favors bears by $100 million.
- Between $42,000 and $43,000: 1,850 calls vs. 3,300 puts. The net result favors put (bear) instruments by $60 million.
- Between $43,000 and $45,000: 2,700 calls vs. 2,800 puts. The net result is balanced between call (buy) and put (sell) options.
This rough estimate takes into account the put options used in bearish bets and the call options used exclusively in neutral to bullish trades. Nevertheless, 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 certain price, but unfortunately there is no easy way to gauge this effect.
Related: Mark Yusko explains the real problem with Fed policy – and why bitcoin matters.
Bears will try to pin BTC below $41,000
Bitcoin bears need to push the price below $41,000 on April 15 to lock in a $180 million profit. On the other hand, the bulls best-case scenario requires a push above $43,000 to neutralize any impact.
Bitcoin bulls had liquidated $180 million in leveraged long positions on April 10-11, so they should have less margin than needed to push the price higher. With this in mind, bears will no doubt attempt to push BTC below $41,000 before the options expire on April 15.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You should do your own research when making a decision.