How Will Price Action be Affected Now That Deribit’s USD 1.5 Billion in BTC Options Have Expired?

How Will Price Action be Affected Now That Deribit’s USD 1.5 Billion in BTC Options Have Expired?

 Published: August 2nd, 2021

Bitcoin options worth USD 1.5 billion expired on Friday July 30, 2021 on the crypto derivatives exchange Deribit. With BTC price bouncing back from lows by 10 per cent in the last four weeks, bitcoin bulls could see a sizable discount.

An options contract lets a buyer purchase an asset, BTC in this case, for a pre-agreed price by a set date. Contracts are typically structured to be traded within a calendar month, usually before the last Friday, incentivising the buyer to wait until the last possible minute to see how price action develops. Options are just as described — optional. A trader can exercise an option, sell it to someone else, or simply let it expire.

Options have a price threshold called the ‘max pain price,’ which is the point where gains start to disappear. For a price any lower than max pain, a trader would be better off purchasing bitcoin outright rather than wasting money on an option to purchase. On Derabit, the max pain price for BTC in July was USD 35,000.

Data from Nomics has Bitcoin finishing off July at roughly USD 39,600. Traders who bought options when BTC’s price was still on the slide could see a discount if they exercised their options when markets were recovering.

With this week's trading session just underway, it's too soon to tell what will happen exactly, but suffice to say that any trader exercising an option at USD 35,000 instead of USD 39,000 on Friday saw a significant discount. If they were in a mood to buy, a rush to exercise options could push up bitcoin’s price further this week.

On Friday, the put/call ratio for BTC (the standard metric used to measure investor sentiment) was 0.85, putting it into moderately bearish territory. That means bitcoin bulls had an opportunity to make significant gains.

Options come in two forms: ‘call’ options, which are contracts that provide an option to buy at a specific price; and ‘put’ options, which are contracts that provide an option to sell at a specific price.

If traders are buying more call options, it means that they expect the price is going to go up. When traders are buying more put options, it suggests that they're looking for a hedge that will allow them to cash out if the price of the asset (BTC) crashes.

Big rallies after options expiry are the norm this year

Something similar occurred at the end of April when USD 3.6 billion in bitcoin options came due. At the time, analysts at Arcane Research told Bloomberg that a large options expiry has the power to shift the market, even if investors are in a mood to hold onto their BTC.

'So far this year, we've seen forceful rallies in bitcoin’s price following each monthly options expiry, so the recent history suggests that any large expiry is going to help anchor the price the price of bitcoin in the short term.’

Reality didn’t quite match up to expectation in May and June when the price of bitcoin fell back sharply from near-record highs pushing past the USD 60,000 mark to as low as USD 31,000. June’s month-end options expiry did, at last, lead to another rally.

Bitcoin bulls will hope that this week sees a similar trend.

Most BTC options were sold at a loss last month

Bitcoin’s price was on an unprecedented tear for much of 2021, pulling in new retail buyers and a wave of interest from institutional investors and other former crypto holdouts in traditional finance. Price reached record highs and prompted record trading volumes.

That all went into reverse in June and early July. Now a report from crypto analytics firm Glassnode confirms that most of the coins traded last month were being sold by investors who bought the top of the market and now want to cut their losses, painting a bearish picture for BTC, at least in the short term.

‘The Bitcoin network spent much of July settling at USD 5.3 billion a day, compared to volumes of around USD 15.5 billion a day at the 2021 peak,’ the report notes. ‘Of the volumes settled last month, the majority look to have been liquidated positions that were seeing losses.’

Put another way, most investors in July were selling their BTC for less than they bought it for. It's easy to see why. The price had dropped by more than half from an all-time high of USD 63,559 and touched under USD 30,000 before it began to climb back.

Glassnode’s report says that 32 per cent of the Bitcoin in active circulation is now ‘holding an unrealised loss.’ That means a third was purchased for more than the low USD 30,000 levels (or less) seen in June and early July. Since Bitcoin's price hadn’t achieved those levels before January 2021, the report pointed at short-term holders.

The firm says long-term holders, in contrast, are doing just fine. They control close to three-quarters of the circulating supply, and more than 92 per cent of their positions are in profit. Glasnode projects that, on current trends, long-term holders will raise their percentage to about 80 per cent of supply by September.

That will almost certainly create a lack of liquidity and send the price shooting upward again.

As supply gets tighter, prices go up. But the firm’s analysts added this caveat: all the coins being held at a loss have the potential to develop overhead resistance and come under intense sell pressure.

The take-away is that crypto traders shouldn't bank on Bitcoin's price simply returning to 2021 highs in August or even September. Hanging on for the long term, however, could also see them through to the next peak.

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