Bitcoin Options Data Shows BTC Price Below $17K Gives Bears A $200M Payoff On Friday

Bitcoin (BTC) crashed below $16,000 on November 9, driving its price to its lowest level in two years. The two-day correction represented a 27% downtrend and wiped out $352 million worth of long (buy) futures contracts.

To date, the Bitcoin price has declined 65% for 2022, but it is important to compare the price action with the world’s largest technology companies. For example, Meta Platforms ( META ) is down 70% year-to-date, and Snap Inc. ( SNAP ) is down 80%. Also, Cloudflare ( NET ) lost 71% in 2022, followed by Roblox Corporation ( RBLX ), down 70%.

Inflationary pressures and fears of a global recession have driven investors away from riskier assets. This protective move has pushed US Treasuries’ five-year yield to 4.33% earlier in November, the highest level in 15 years. Investors are demanding a higher premium to hold government debt, signaling a lack of confidence in the Federal Reserve’s ability to curb inflation.

Contagion risks from FTX and Alameda Research’s insolvency are the most pressing issues. The trading group managed several cryptocurrency project funds and was the second largest trading exchange for Bitcoin derivatives.

The Bulls were overly optimistic and will suffer the consequences

The open interest for the November 11 options expiration is $710 million, but the actual number will be lower since bulls were ill-prepared for prices below $19,000. These traders were confident after Bitcoin stayed above $20,000 for nearly two weeks.

The call-to-put ratio of 0.83 reflects the imbalance between $320 million call (buy) open interest and $390 million put (sell) options. Currently, Bitcoin is near $17,500, which means that most bullish bets will likely become worthless.

If Bitcoin’s price remains below $18,000 at 08:00 UTC on November 11, only $45 million of these call (call) options will be available. This difference occurs because the right to buy Bitcoin at $18,000 or $19,000 is useless if BTC trades below that level at expiration.

The Bears are targeting sub-$17,000 to secure a $200 million profit

Below are the three most likely scenarios based on current price action. The number of option contracts available on 11 November for buy (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

• Between $16,000 and $18,000: 1,300 calls vs. 12,900 sets. Bears dominate and earn $200 million.
• Between $18,000 and $19,000: 2,500 calls vs. 10200 putts. The net result favors the put (bear) instruments by $140 million.
• Between $19,000 and $20,000: 3,600 calls vs. 5,900 putts. The net result favors the put (bear) instruments by $40 million.

This rough estimate considers the call options used in bullish plays and the put options exclusively in neutral-to-bearish trades. Yet this oversimplification ignores more complex investment strategies.

For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a certain price, but unfortunately there is no easy way to estimate this effect.

Related: Grayscale Bitcoin Trust Records 41% Discount Amid FTX Crash

Bulls likely have less margin to support the price

Bitcoin bulls need to push the price above $19,000 on November 11 to avoid a potential loss of $140 million. On the other hand, the bears’ best-case scenario calls for a slight push below $17,000 to maximize gains.

Bitcoin bulls had just liquidated long positions of $352 million in two days, so they may have less margin required to support the price. In other words, bears have an edge to peg BTC below $17,000 before the weekly options expire.