Until April 25, the Bitcoin (BTC) bulls were defending the $38,000 level, but the bulls were caught off guard by the recent drop. With Bitcoin dropping from $46,700 to $37,700 between April 5 and 26, most of the bullish bets for the upcoming $1.96 billion monthly options expiry are worthless.
Regulatory concerns remain a threat to Bitcoin, and on April 26, the New York State Assembly passed a bill banning carbon-based Proof of Work (PoW) mining facilities in the state. Fortunately for Bitcoin, mining equipment is portable, so there is no real risk to the security of the Bitcoin network, but the ongoing threat of anti-crypto legislation could have an impact on the price.
Geopolitical tension in Europe has also led to investors shunning riskier assets and many seeking protection in US dollar-denominated assets. CNBC reported that the impact of Russia’s state energy company Gazprom’s decision to halt natural gas supplies to Poland and Bulgaria has raised concerns about a deeper economic slowdown in the eurozone.
Investors are also obsessed with a potential US Federal Reserve interest rate hike of 250 basis points planned throughout 2022. The gambit aims to contain inflationary pressure but could push global economies into recession and this is another reason why investors are avoiding highly volatile assets like cryptocurrencies.
Bulls never expected prices below $40,000
The open interest for the April 29 expiration of Bitcoin options is $2 billion, but the actual number will be much lower because the bulls did not anticipate the price of BTC dropping below $40,000.
These traders may have been scammed because Bitcoin held over $45,000 between March 27 and April 6, placing massive bets for monthly options expiration above $50,000.
The 1.55 buy-to-be ratio shows larger bullish bets as the open interest for call (buy) is $1.19 billion versus put (call) of $770 million. However, with Bitcoin standing near $39,000, it is likely that most of the bullish bets will become worthless.
For example, if the price of Bitcoin remains below $40,000 at 8:00 AM UTC on April 29, then only $60 million worth of (buy) options for these calls will be available (buy). This difference occurs because there is no use in the right to buy Bitcoin at $40,000 if it is trading below that level at expiration.
Bulls need $41,000 to balance the scales
Here are the three most likely scenarios based on current price action. The number of options contracts available on April 29 for buy (buy) and sell (sell) instruments varies, depending on the expiration price. The imbalance in favor of each side constitutes the theoretical profit:
- Between $37,000 and $39,000: 600 calls vs 9800 puts. Net result favors bots by $350 million.
- Between $39,000 and $40,000: 1500 calls vs 8300 puts. The net result favors the Bears by $260 million.
- Between $40,000 and $41,000: 3400 calls vs 5600 puts. Bears are still in a better position by $90 million.
- Between $41,000 and $42,000: 4100 calls vs 4700 puts. Bots are preferred by $30 million.
This crude estimate takes into account the buy options used in bearish bets and the call options exclusively in neutral to bullish trades. However, this oversimplification overlooks 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 estimate this effect.
Bears aim to make a profit of $350 million
Bitcoin bears need to press the price below $39,000 on April 29 to lock in a profit of $350 million. On the other hand, the best case scenario for the bulls would require a 6% price push above $41,000 to cut their losses to $30 million.
Bitcoin speculators have liquidated $330 million of leveraged long positions in the past seven days, so they may have less margin required to push up the price of Bitcoin. With that in mind, the bears are likely to try to suppress BTC below $39,000 until the April 29 options expiration.
The opinions and opinions expressed here are solely those of author and do not necessarily reflect the opinions of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.