The past few months have been less than pleasant for Bitcoin (BTC) bulls, but they are not alone. Persistent comments from the United States Federal Reserve hint at plans to raise interest rates in 2022 and thi is causing investors to seek protection in inflation-protected bonds.
The monetary authority signaled its intention to substantially raise the benchmark interest rate and they will also gradually reduce the monthly purchase of debt assets.
Even though some crypto investors deem Bitcoin digital scarcity as inflationary protection, that does not change its volatility. In turn, it causes the asset price to move in tandem with risk markets.
Bitcoin price at Coinbase, USD (right) vs. Russell 2000 index (left)
The above chart shows Bitcoin price in blue stacked against the smaller U.S. listed companies, as measured by the Russell 2000 equity markets index. Unlike the S&P 500 or Dow Jones Industrial Index, this benchmark excludes those tech giants. Thus, the smaller companies are usually considered riskier and are more impacted when investors fear an economic downturn.
However, the negative performance did not scare investors as the Canada-based Purpose Bitcoin ETF attracted over $38 million worth of Bitcoin this Tuesday, its third-largest daily inflow to date. The fund now holds 31,032 BTC, equivalent to $1.2 billion.
Regardless of investors' sentiment, Bitcoin bulls could face a $120 million loss if BTC price moves below $36,000 on Friday's options expiry.
$730 million in options expire on Feb. 4
According to Friday's options expiry open interest, Bitcoin bulls placed heavy bets between $40,000 and $44,000. These levels might seem optimistic right now, but Bitcoin was trading above $42,000 two weeks ago.
Bitcoin options aggregate open interest for Feb. 4. Source: Coinglass.com
At first sight, the $430 million call (buy) options dominate the $300 million put (sell) instruments, but the 1.43 call-to-put ratio does not really tell the whole story. For example, the 14% price drop over the past two weeks wiped out most bullish bets.
A call option gives the buyer a right to buy BTC at a fixed price at 8:00 am UTC on Feb. 4. However, if the market is trading below that price, there is no value in holding that derivative contract, so its value goes to zero.
Therefore, if Bitcoin remains below $37,000 at 8:00 am UTC on Feb. 4, only $34 million of those call (buy) options will be available at the expiry.
Bears will fight to keep Bitcoin below $37,000
Here are the three most likely scenarios for Friday's options expiry. The imbalance favoring each side represents the theoretical profit. In other words, depending on the expiry price, the active quantity of call (buy) and put (sell) contracts varies:
Between $35,000 and $37,000: 950 calls vs. 4,210 puts. The net result is $120 million favoring the put (bear) instruments.Between $37,000 and $38,000: 1,650 calls vs. 3,300 puts. The net result favors bear instruments by $60 million.Between $38,000 and $39,000: 4,230 calls vs. 1,710 puts. The net result is balanced between call and put options.
This crude estimate considers call options used in bullish bets and put options exclusively in neutral-to-bearish trades. However, this oversimplification disregards more complex investment strategies.
Bulls need $38,000 to balance the scales
A mere 3% price pump from the current $36,900 level is enough for Bitcoin bulls to avoid a $120 million loss on the Feb. 4 options expiry. Still, the same rationale applies to Bitcoin bears because pinning BTC below $37,000 can easily cause them to secure a $120 million profit.
Considering the short-term negative sentiment caused by tighter macroeconomic conditions, Bitcoin bulls should pace their energy for a sustainable recovery to $40,000 and higher instead of wasting efforts right now. Therefore, options markets data slightly favor the put (sell) options.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.