Janice R. Andrews
After a wild ride to its highest point, Bitcoin is now at a crossroads where it might see a sharp decline due to increased demand for options or another parabolic spike.
Bitcoin has increased in value by almost 20% in the last week due to the persistent demand for US exchange-traded funds that contain the cryptocurrency. With Bitcoin trading at over $62,000 as of Friday, traders are now aiming for the elusive record price of almost $69,000, which was last seen during the Covid epidemic.
Research associate Luke Nolan of digital asset company CoinShares highlighted the possibility of yet another sharp upward rise. “Everything is pointing towards the possibility of another violent upward move if momentum keeps us moving up,” he said. But Nolan warned that even a little change in ETF flows might cause quick deleveraging, underscoring the market’s intrinsic volatility.
The surge in interest in short-term options has caused Bitcoin volatility to soar to heights not seen since the demise of the cryptocurrency-friendly Silicon Valley Bank in the previous year. The notional value of call and put options contracts expiring on March 29 has increased to about $7 billion, surpassing the value of other contracts with the same expiration date, according to statistics from Amberdata.
This spike in short-term options, especially those with limited range of strike prices, is a precursor to a possible gamma squeeze, in which a change in price prompts a sharp move in the market. According to Deribit statistics, the current spot market price is in close vicinity to $65,000, $60,000, and $70,000, which is where the majority of open interest for contracts expiring on March 29 is concentrated.
Nolan clarified the dynamics by saying, “We can see a huge amount of OTM (out of money) calls that are still occurring.” I think we could have a squeeze if Bitcoin gets to levels close to that. He underlined how this behavior is self-reinforcing, with dealers or market makers driving additional price hikes by buying more underlying tokens in order to hedge their exposure.
Although ETFs have been a major factor in the current run, cryptocurrency derivatives—specifically, futures and options—have been much more important. Because of their capital efficiency and ability to eliminate the risks associated with owning cryptocurrencies directly, these products have drawn the attention of both institutional and individual investors.
Leading cryptocurrency options exchange Deribit had record-breaking activity on Thursday, as the total amount of options open interest reached $27 billion and the 24-hour trading volume reached $12.4 billion. Deribit’s chief commercial officer, Luuk Strijers, emphasized the rise of Bitcoin call options, especially in the 60K to 70K area, with significant call skew.
But if the digital currency has a downturn, the spread of leveraged long bets via Bitcoin futures may intensify downward pressure. One important measure of leverage, the financing rate for Bitcoin perpetual futures, has increased dramatically in the last few days, suggesting more speculative activity. Significant short liquidations occurred in the run-up to Wednesday’s meteoric surge in Bitcoin prices.
With options suggesting that a “violent” move is likely, Bitcoin is poised for a potentially turbulent period. The relationship between ETFs, derivatives, and market dynamics will probably determine the future course of the most well-known cryptocurrency in the world as traders prepare for more volatility.
