Bitcoin (BTC) bulls flipped the table on March 4’s options expiry after a 14% rally on Feb. 28. Holding the price above $43,000 confirms a decoupling from traditional markets. For instance, the MSCI Emerging Markets Equities Index is down by 3.5% in five days, while the United States Russell 2000 Small-Capitalization Index gained 0.9%.
Investors are increasingly concerned about the ramifications of the U.S. Federal Reserve rate hikes expected throughout 2022. As a result, in the past 30 days, some big names took a hit. For instance, Paypal PYPL traded down 38%, META corrected 34% and Shopify SHOP lost 31.5%.
The 40-year high U.S. Consumer Price Index 7.5% inflation data caused investors to take profits on riskier assets and the U.S. Dollar Index (DXY) to reach its highest level in 20 months at 97.6. The DXY measures the dollar’s strength against a basket of top foreign currencies and increases when traders seek shelter in the North-American money.
Bitcoin is high risk, but its price looks discounted
Bitcoin’s recent strength surprised most investors as its correlation versus the Nasdaq Composite index reached 73% on Feb. 20, nearing the 74% five-year high in 2020.
Call (buy) and put (sell) option instruments are evenly matched for the March 4 options expiry but bears were caught by surprise after the Bitcoin price stabilized above $43,000 this week.
A broader view using the call-to-put ratio shows a balance between the $450 million call (buy) open interest versus the $440 million put (sell) options. However, the 1.02 call-to-put indicator is deceptive because most bearish bets will become worthless.
For example, if Bitcoin’s price remains above $43,000 at 8:00 am UTC on Feb. 11, only $155 million worth of those put (sell) options will be available. This difference happens because there is no use in a right to sell Bitcoin at $40,000 if it trades above that level on expiry.
Bulls might pocket a $320 million profit
Below are the three most likely scenarios based on the current price action. The number of options contracts available on March 4 for bulls (call) and bear (put) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
- Between $42,000 and $44,000: 560 calls vs. 150 puts. The net result is $175 million favoring the call (bull) instruments.
- Between $44,000 and $46,000: 760 calls vs. 40 puts. The net result favors bulls by $320 million.
- Between $46,000 and $47,000: 840 calls vs. 5 puts. Bulls boost their gains to $380 million.
This crude estimate considers the put options used in bearish bets and the call options exclusively in neutral-to-bullish trades. Even so, this oversimplification disregards more complex investment strategies.
For instance, a trader could have sold a put option, effectively gaining a positive exposure to Bitcoin above a specific price. But, unfortunately, there’s no easy way to estimate this effect.
Bears are likely to throw in the towel
Bitcoin bulls need a 1% pump above $44,000 to score a $250 million profit on March 3. On the other hand, bears’ best case scenario requires a 4.5% price drop from the current $44,800 to cut their loss down to $110 million.
Bitcoin bears recently had $300 million leverage short positions liquidated, so it’s unlikely that they will have the backing required to pressure BTC price in the short term.
With this said, bulls will probably continue to display strength by pushing the price to $45,000 or higher during March 4 options expiry.
