Wednesday, September 27, 2023
Market Analysis

Bitcoin price capitulation below $26K possible as Friday’s BTC options expiry looms

Bitcoin (BTC) price lost steam after a failed rupture of the $27,500 resistance on May 15, putting bears in a better position for the May 19 expiry. The regulatory newsflow likely played a key role in trimming investors’ risk appetite as governments seek more control over the sector.

In a memo circulated among committee members, Democrats in the United States legislature sought to cement the SEC’s authority over crypto. The document was made public on May 10, including the argument that nearly all digital assets constitute securities. Moreover, according to Gensler’s view, even network nodes are in violation of securities laws.

The United Kingdom’s Treasury Committee “strongly recommended” on May 17 regulating retail crypto trading and investment activity as gambling, consistent with the principle of “same risk, same regulatory outcome.” Treasury Committee Chair Harriett Baldwin described Bitcoin and Ether as accounting for two-thirds of the total market capitalization of crypto assets, both of which she claimed are “unbacked.”

The $735 million Bitcoin weekly options expiry on May 19 might play a decisive role in determining whether the price will capitulate by falling below $26,000.

Bitcoin could be making a short-term bottom

Bitcoin bears will try to take advantage of the negative regulatory environment, and uncertainty caused by the risk of the U.S. Treasury ‘running out of funds’ as the debt ceiling approaches. Such a pessimistic scenario partially explains why some Bitcoin traders decided to reduce exposure over the past couple of weeks.

Bitcoin four-hour price movements during option expiries. Source: TradingView

Bitcoin price traded down 6.6% in the 36 hours that preceded the latest BTC options expiry on May 12, marking a short-term bottom on the 4-hour chart. More importantly, the subsequent 3-day rally towards $27,500 was short-lived, favoring the thesis of bearish momentum.

Bitcoin options data shows bulls were excessively optimistic

The open interest for the May 19 options expiry is $735 million, but the actual figure will be lower since bulls concentrated their wagers above $28,000. These traders got excessively optimistic after Bitcoin’s price gained 7% between May 12 and May 15, testing the $27,500 resistance.

Bitcoin options aggregate open interest for May 19. Source: CoinGlass

The 0.42 call-to-put ratio reflects the imbalance between the $424 million in call (buy) open interest and the $312 million in put (sell) options. However, if Bitcoin’s price remains near $26,500 at 8:00 am UTC on May 19, only $30 million worth of these call (buy) options will be available. This difference happens because the right to buy Bitcoin at $27,000 or $28,000 is useless if BTC trades below that level on expiry.

Related: Tether to buy Bitcoin based on monthly net profits

Bitcoin bulls aim for $27,000 to balance the scales

Below are the four most likely scenarios based on the current price action. The number of options contracts available on May 19 for call (bull) and put (bear) instruments varies depending on the expiry price.

The imbalance favoring each side constitutes the theoretical profit:

  • Between $25,000 and $26,000: 100 calls vs. 7,800 puts. Bears in total control, profiting $190 million.
  • Between $26,000 and $27,000: 1,100 calls vs. 4,300 puts. The net result favors the put (sell) instruments by $80 million.
  • Between $27,000 and $28,000: 2,300 calls vs. 2,000 puts. The result is balanced between put and call options.
  • Between $28,000 and $29,000: 5,700 calls vs. 700 puts. The net result favors the call (bull) instruments by $140 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 call option, effectively gaining negative exposure to Bitcoin above a specific price. Unfortunately, there’s no easy way to estimate this effect.

Still, traders should be cautious as the bears are currently in a better position for Friday’s weekly options expiry, favoring negative price moves. Thus, an eventual capitulation below $26,000 should not be discarded.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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