Bitcoin (BTC) has been trying to break out of a downtrend over the past week and the first attempt on June 16 failed to break the $22,600 resistance. The second attempt at $21,400 on June 21 was followed by an 8% price correction. After two failed breakouts, the price is currently trading below $20,000 and raises the question of whether $17,600 was really the low.
The longer it takes for BTC to break out of this downtrend, the stronger the resistance line becomes and traders follow the trend closely. This is precisely why it is important for the bulls to show strength in the monthly options expiration of $2.25 billion this week.
Regulatory uncertainty continues to weigh on crypto markets after European Central Bank (ECB) President Christine Lagarde expressed her belief on the need for tighter oversight. On June 20, Lagarde shared his thoughts on the industry’s staking and lending activity: “[…] lack of regulation often covers fraud, completely illegitimate claims on valuation, and very often speculation as well as criminal dealings.”
Bitcoin miners forced to liquidate their BTC holdings add further negative pressure on the price of BTC and data from Arcane Research shows that publicly traded Bitcoin mining companies sold 100% of their BTC production in May, against the usual 20% to 40% in the previous month. Currently, the miners collectively hold 800,000 BTC, raising fears of a possible sell-off. The Bitcoin price correction undermined the profitability of miners as the cost of production sometimes exceeded their margins.
The June 24 options expiry will be particularly alarming for investors, as Bitcoin bears are expected to make a profit of $620 million by knocking BTC below $20,000.
The bulls placed their bets at $40,000 and above
Open interest for the June 24 options expiry is $2.25 billion, but the actual figure will be much lower as the bulls were overly bullish. These traders completely missed the target after BTC fell below $28,000 on June 12, but their bullish bets for the monthly options expiration extend beyond $60,000.
The call-to-put ratio of 1.70 shows the dominance of the $1.41 billion call (purchase) open interest over the $830 million put (put). Nonetheless, as Bitcoin sits below $20,000, most bullish bets will likely become worthless.
If the price of Bitcoin remains below $21,000 at 8:00 UTC on June 24, only 2% of these call options will be available. This difference occurs because a right to buy Bitcoin at $21,000 is worthless if BTC is trading below that level at expiry.
The bears have the bulls by the horns
Below are the three most likely scenarios based on the current price action. The number of Bitcoin options contracts available on June 24 for buy (bullish) and sell (bearish) instruments varies depending on the expiry price. The imbalance in favor of each side constitutes the theoretical gain:
- Between $18,000 and $20,000: 500 calls against 33,100 puts. Net income favors selling instruments (bearish) by $620 million.
- Between $20,000 and $22,000: 2,800 calls versus 27,00 puts. The net result favors the bears by $520 million.
- Between $22,000 and $24,000: 5,900 calls versus 26,600 puts. The net result favors the put (bear) instruments by 480 million dollars.
This raw estimate considers put options used in bearish bets and call options exclusively in neutral to bullish trades. Even so, this oversimplification fails to account for more complex investment strategies.
For example, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price, but unfortunately there is no easy way to estimate this effect.
A few more dips below $20,000 wouldn’t be surprising
Bitcoin bears need to push the price below $20,000 on June 24 to secure a profit of $620 million. On the other hand, the bulls’ best-case scenario requires a pump above $22,000 to reduce the impact by $140 million.
Bitcoin bulls had $500 million in leveraged long positions liquidated on June 12-13, so they should have less margin than needed to push the price higher. Given this data, the bears are more likely to pin BTC below $22,000 ahead of the June 24 options expiry.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of TSWT. Every investment and trading move involves risk. You should conduct your own research when making a decision.