BTC staged a small relief rally, but securing the $41,000 level is the key to whether or not the current selloff is over.
In the last three months, the daily closing price of Bitcoin (BTC) fluctuated between $35,050 and $47,550, which is a range of 35.7%. Although it may seem excessive, it is not surprising; especially considering the 68% annualized historical volatility of BTC.
The relief rally that occurred after the April 11 drop below USD 40,000 came after the report of the Consumer Price Index (CPI) for March from the United States, which announced 8.5% for March, the highest since 1981. Meanwhile, in the UK, the CPI jumped to 7%, a 30-year high.
For these reasons, cryptocurrency traders are increasingly concerned about the ability of the US Federal Reserve rate hikes, expected throughout 2022, to contain inflationary pressure. If global economies enter a recession, investors will likely move away from risky asset classes like cryptocurrencies.
Additionally, the Bitcoin price correction was costly for leverage traders, as aggregate liquidations reached $428 million on derivatives exchanges.
Bulls Placed their Bets Starting at $50,000
The open interest for the April 15 options expiry in Bitcoin is $615 million, but the actual figure will be much lower as the bulls were too bullish. These traders might have naively followed the short-lived rally to $48,000 on March 28, as their bets for the April 15 options expiry extend beyond $50,000.
Bitcoin’s recent drop below $41,000 caught the bulls by surprise, and they have placed below that price level only 18% of the April 15 call options.
The 1.21 ratio between calls and puts shows the dominance of $335 million of open interest for calls versus $280 million for puts. However, with Bitcoin hovering near $41,000, most bullish bets are likely to be worthless.
If the price of Bitcoin stays below $42,000 at 8:00 a.m. UTC on April 15, only $62 million of these call options will be available. This difference is because a Bitcoin call at $42,000 is worthless if BTC trades below that level at expiration.
Bulls Target $43,000 to Balance the Scales
Below there are the four most likely scenarios based on the current price action. The number of option contracts available on April 15 for call (bullish) and put (bearish) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
Scenario 1: Between $39,000 and $41,000 – 950 purchase options (calls) vs. 5,400 put options. The net result favors put instruments (bearish) by USD 180 million.
Scenario 2: Between $41,000 and $42,000 – 1,500 purchase options (calls) vs. 3,950 put options. The net result favors the bears by $100 million.
Scenario 3. Between $42,000 and $43,000 – 1,850 purchase options (calls) vs. 3,300 put options. The net result favors put instruments (bearish) by USD 60 million.
Scenario 4: Between $43,000 and $45,000 – 2,700 purchase options (calls) vs. 2,800 put options. The net result is balanced between the call and put options.
This simple estimate considers put options used on bearish bets and calls exclusively on neutral or bullish trades. Even so, this oversimplification does not take into account 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.
Bears, Meanwhile, Will Try to Pin BTC below $41,000
Bitcoin bears need to push the price below $41,000 on April 15 to lock in a $180 million profit. On the other hand, the bulls’ best-case scenario calls for a push above $43,000 to neutralize any impact.
Bitcoin bulls had $180 million in leveraged long positions liquidated on April 10 and 11, so they should have less margin than needed to drive the price higher. That said, the bears would no doubt try to sink BTC below $41,000 ahead of the April 15 options expiry.
By Audy Castaneda
