Bitcoin Options Show Potential for ‘Violent’ Move as Price Surges

After a rapid climb towards a record high, Bitcoin is now on the verge of experiencing another parabolic surge or a significant drop, as indicated by the surging demand for options. The price of Bitcoin has already increased by around 20% since last Friday, with traders betting that it will soon surpass its previous record of almost $69,000. However, the seemingly unstoppable demand for Bitcoin-focused exchange-traded funds (ETFs) has left the market in a vulnerable position.

Luke Nolan, a research associate at CoinShares, stated, “All things are pointing towards if momentum keeps us going up, then we could see another violent move upwards.” However, even a slight change in ETF flows could trigger rapid deleveraging, leading to a sudden decline in Bitcoin’s price. The influx of buyers for short-term options has significantly increased Bitcoin’s volatility, reaching levels not seen since the downfall of Silicon Valley Bank’s crypto-friendly era last year.

The notional value of call and put options contracts set to expire on March 29 has surged to approximately $7 billion, surpassing the value of any other contracts on that specific expiry date. This surge in short-term options, which have strike prices within a relatively narrow range, has set the stage for a potential “gamma squeeze,” where a change in price triggers a rapid market swing. Currently, the open interest for these contracts is concentrated around $65,000, $60,000, and $70,000, close to Bitcoin’s current spot market price.

Nolan commented, “We can see still a huge amount of OTM (out of money) calls. If Bitcoin pushes to levels near that, then in my opinion we could certainly get a squeeze.” When a large number of call options are purchased, the sellers of these options, typically dealers or market makers, need to hedge their exposure. This usually involves buying the underlying asset to mitigate directional risk. If Bitcoin’s price starts to rise, the dealers will need to hedge further, resulting in increased buying pressure on the underlying token.

Nolan added, “This self-perpetuating loop can lead to a rapid price increase as dealers push the price up, causing them to have to buy more.” While ETFs have been the driving force behind Bitcoin’s recent rally, it’s important to note that crypto derivatives, such as futures and options, have played a significant role as well. These derivatives provide institutional and retail investors with capital efficiency and ease of access compared to holding the cryptocurrency directly.

On Thursday, Deribit, one of the largest crypto options exchanges, reported record highs across multiple categories. The total options open interest reached $27 billion, with $12.4 billion in 24-hour trading volume. Luuk Strijers, Chief Commercial Officer at Deribit, noted, “Over the past few days, we’ve observed significant activity in Bitcoin call options, particularly in the 60K to 70K range, accompanied by notable call skew. With especially short-dated volatility remaining elevated, we anticipate continued demand for upside calls, albeit with potential bouts of turbulence.”

Additionally, Bitcoin futures could exert further downward pressure on the digital asset if its price drops. Traders have been heavily investing in leveraged long positions through such derivatives, resulting in a higher funding rate for Bitcoin perpetual futures. This rate is a key indicator for leverage and has seen significant short liquidations leading up to Bitcoin’s parabolic rise on Wednesday.

In summary, Bitcoin is at a critical juncture as it undergoes a surge in demand for options. While the rally has been fueled by ETFs, the rise in short-term options and the potential for a gamma squeeze indicate the possibility of a volatile market. As traders continue to bet on Bitcoin’s upward trajectory, the emergence of leveraged long positions in Bitcoin futures adds another layer of risk to the market. Investors should closely monitor the evolving situation and exercise caution in their trading strategies.

(This article was written by an expert from Business Today. For more finance and economic news, visit Business Today website.)