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Maintaining $20.8K in this week’s $1 billion Bitcoin options expiry is vital

Crypto FOMO
Crypto FOMO / Image Credit: CRYPKYP
1661331694 24 Aug / 09:01

A failure of this level before this week's $1 billion options expiry could result in considerably more downside since BTC bulls were liquidated during last week's decline to $20,800.

Between August 15 and August 19, Bitcoin (BTC) underwent a 16.5% correction as it tried to test the $20,800 support. Although the decline is shocking, a $4,050 price difference is quite negligible, especially considering Bitcoin's 72% annualized volatility.

The S&P 500's volatility is currently 31%, which is noticeably lower, but between June 8 and June 13, the index lost 9.1% of its value. Therefore, the index of significant U.S.-listed businesses experienced a more abrupt shift when corrected for the historical risk metric.

After the Chinese central bank was compelled to lower the prime rate for five-year loans on August 21 due to deteriorating real estate markets there, confidence among cryptocurrency investors worsened at the beginning of this week. Additionally, a strategist with the investment bank Goldman Sachs said that the U.S. Federal Reserve would tighten the economy even more due to inflationary pressure, which would hurt the S&P 500.

Despite the present 80/100 correlation between equities and Bitcoin, investors frequently seek safety in the U.S. dollar and inflation-protected bonds when they anticipate a crisis or market meltdown. All risk markets, including cryptocurrencies, experience increased selling pressure due to this phenomenon, described as a “flight to quality.”

The $20,800 support has resisted all attempts by the bears to break through it. This trend explains why, despite the recent 16.5% loss in 5 days, bulls may benefit from the $1 billion Bitcoin monthly options expiry on August 26.

Only 12% of the call (buy) options for the monthly expiry have been placed above $22,000, which astonished bulls as to why Bitcoin had such a sharp drop after failing to break the $25,000 resistance on August 15. Thus, despite placing fewer bets, Bitcoin bears are in a superior position.

Given that the call (buy) open interest is $560 million versus the put (sell) genuine interest of $450 million, a broader view is utilizing the 1.25 call-to-put ratio reveals greater bullish bets. However, as Bitcoin is trading below $22,000, most bullish wagers will probably lose their value.

For instance, only $34 million worth of these put (sell) options will be available on August 26 at 8:00 am UTC if Bitcoin’s price continues below $22,000. This discrepancy arises because the right to sell Bitcoin at $22,000 is useless if it trades over that price at expiration.

The four most likely outcomes are listed below based on the price movement right now. Depending on the expiry price, different call (bull) and put (bear) instruments have other numbers of options contracts available on August 26. The potential profit is the difference that favors either side:

  • In the $20–21k range, 1,100 calls and 8,200 puts were made. In the end, the bears win by $140 million.
  • In the $21,000–$22,000 range, 1,600 calls and 6,350 puts were made. Overall, bears are $100 million better off.
  • There were 5,000 calls and 4,700 puts between $22,000 and $24,000. Overall, there is an even distribution of bulls and bears.
  • 7,700 calls are made for every 1,000 puts between $24,000 and $25,000. Overall, bulls are $160 million better off.

This rough estimate considers only putting options in neutral to bearish trades and call options alone in bullish wagers. However, this simplicity ignores more sophisticated investment techniques.

To balance the scales and prevent a possible $140 million loss, bitcoin bulls need to drive the price above $22,000 on August 26. However, Bitcoin bulls had leveraged long futures contracts worth $210 million liquidated on August 18, so they are less likely to drive the market higher shortly.

With that said, the $22,000 to $24,000 area, which offers a balanced conclusion for bulls and bears, is the most likely scenario for August 26.

The $140 million loss in the monthly expiry will be the least of their issues if bears demonstrate any power and BTC loses the crucial $20,800 support. The action would also invalidate the previous $20,800 low from July 26 and stop the seven-week climbing trend.

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