Bitcoin bears risk getting trapped if BTC price remains above $50K — Here’s why
By Kathi on Oct 07, 2021 | 05:37 AM IST
Hash rate, supply shock and U.S. credit risk are likely the
causes for the BTC rally.
Bitcoin’s (BTC) 32% weekly rally became bears’ worst
nightmare as Friday’s $860million options expiry is approaching. After breaking
the $54,000 level, over 99% of the bearish bets using put (sell) options are
likely to become worthless.
Bears are in a dangerous position, particularly as
Bloomberg’s Crypto Outlook pointed out that Bitcoin’s $50,000 resistance was
about to flip support. Senior commodity strategist Mike McGlone cited such
factors as increasing adoption along with a diminishing supply on exchanges.
Bloomberg also noted that traditional finance investors’
concerns surged after the protection against the possibility of a United States
government default rose to its highest level in six years. Moreover, one-year
credit-default swaps, or the cost to insure against a payment delay, have risen
to 27 basis points from 4 basis points since mid-September.
Another crucial metric that certainly fueled this week’s
bull run was Bitcoin’s hash rate, the estimated processing power backing the
network miners. The capacity took a big blow in May, as China vetoed coal-based
energy use for mining cryptocurrencies. Then, in early June, the country
decided to ban cryptocurrency mining for good, which temporarily took many
miners offline, impacting the hash rate.
This week, the bulls picked up on these favorable
conditions and pushed Bitcoin to its highest level since May 12 at $55,000. As
for the $860-million options expiry on Friday, Oct. 8, bears need a miracle to
push the price below $50,000 to avoid significant losses.
As the above data shows, bears placed $400 million in bets
for Friday’s expiry, but it appears that they were caught by surprise as 99% of
the put (sell) options are likely to become worthless.
In other words, if Bitcoin remains above $54,000 on Friday,
only $2.7 million worth of neutral-to-bearish put options will be activated on
the expiry. A right to sell (put option) Bitcoin at $50,000 becomes worthless
if BTC trades above that price at 8:00 am UTC on Friday.
Open interest is fairly balanced between bulls and bears
The 1.16 call-to-put ratio represents the slight difference
between the $465 million worth of call (buy) options versus the $400 million in
put (sell) options. Although favoring bulls, this broader view needs a more
detailed analysis because some bets are implausible considering the current
price.
Below are the four likeliest scenarios for Friday’s expiry.
The imbalance favoring either side represents the theoretical profit. In other
words, depending on the expiry price, the quantity of calls (buy) and puts
(sell) contracts becoming active varies:
Between $48,000 and $50,000: 3,515 calls vs.1,765 puts. The
net result is $85 million favoring the call (bull) instruments.
Between $50,000 and $54,000: 6,270 calls vs. 735 puts. The
net result is $290 million favoring the call (bull) instruments.
Between $54,000 and $56,000: 6,930 calls vs. 50 puts. The
net result is $370 million favoring the call (bull) instruments.
Above $56,000: 7,600 calls vs. 0 puts. The net result is a
complete dominance with bulls profiting $425 million.
This raw estimate considers call options being exclusively
used in bullish bets and put options in neutral-to-bearish trades. However,
investors might have used a more complex strategy that typically involves
different expiry dates.
Bears are wrecked one way or another
To sum up, the bulls have absolute control of Friday’s
expiry and enough incentives to keep the price above $54,000. On the other
hand, bears need a 10% negative move below $50,000 to avoid the $370-million
loss.
However, one must consider that during bull runs, like the
one Bitcoin is in right now, the amount of effort a seller needs to put in to
liquidate longs is immense and usually ineffective. Put simply, if no surprises
come before Oct. 8, Bitcoin should continue its rally to higher prices.