Cryptoverse: Is Bitcoin Out of the Woods? Consider the options

Feb 7 (Reuters) – Have bitcoin and ether finally turned a corner? It seems so, if crypto options traders are anything to go by.

The volume of bitcoin options traded on Deribit, one of the leading exchanges for crypto-focused derivatives products, rose 82% in January compared to December, according to crypto market maker OrBit Markets. Ether options swelled 38%.

More investors are positioning themselves for capital gains, with volume skewed to bullish call options – paying a premium for an option to buy bitcoin or ether at a future date and agreed price – rather than the conversely bearish put options.

Calls commanded 71.1% of total open interest for bitcoin futures, and 77.5% for ether, according to Deribit data.

“You’ve actually seen a couple of people trading $50,000 calls, for example, that’s been the general appetite we’ve seen — just increased appetite for upside,” said Chinedu Ume-Ezeoke, quantitative research analyst at data firm Laevitas.

Still, the increase in volume indicates that investors are of two minds about the direction of crypto markets, preferring low-risk, low-reward options to actually buying bitcoin or ether.

The surge in options markets, after months of tame trading and depressed volatility, coincides with a 40% jump in the price of bitcoin in January – the best month since October 2021 – and a 32% jump for ether.

“Bitcoin’s rally was explosive, almost like imagining the release of a beach ball that had been forced underwater,” said Joe Ziolkowski, CEO of Relm, a digital insurance company.

FEAR OF A RETREAT

Total open interest for bitcoin futures – which measures the number of contracts not yet settled – across all expirations was 293,000 on January 27, the highest since November, while the put-to-call ratio was 0.42, the lowest in at least a year, according to Laevitas data, suggesting traders preferred calls to puts.

“This is driven by renewed demand for call options as they expect spot momentum to continue higher,” said Pulkit Goyal, vice president of trading at OrBit Markets.

The trend in futures may not necessarily be bullish for bitcoin or ether, as investors also use these derivatives as a hedge against falls in other investments.

“People are interested in the upside potential of bitcoin and ether, but also worried about a potential pullback after the massive rally in prices,” said CK Zheng, founder of crypto-derivatives-focused hedge fund ZX Squared.

“On both sides of the equation, people are trying to get some protection.”

RISK & RECESSION BEHIND

The macro backdrop of a potential US recession or further tightening by the Federal Reserve is just one of several factors that could derail the latest rally.

After US jobs data came in better than expected last week, markets are betting the Fed may raise interest rates longer than initially expected, which could dampen demand for riskier assets such as cryptocurrencies.

“We’re probably not out of the woods yet,” said Ume-Ezeoke at Laevitas. “In the short term, many people expect some kind of correction.”

Reporting by Vidya Ranganathan in Singapore, Lisa Pauline Mattackal and Medha Singh in Bengaluru; Editing by Pravin Char

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