Bitcoin recovers intraday gains as bears aim to push BTC price below $18K

On December 14, Bitcoin (BTC) broke above $18,000 for the first time in 34 days, marking a 16.5% gain from its November 21 low of $15,500. The move followed a 3% gain in 3-day S&P 500 futures, which reclaimed the critical 4,000-point support.

While the BTC price started the day in favor of bulls, investors eagerly awaited the US Federal Reserve’s decision on interest rates, along with Fed Chair Jerome Powell’s comments. The subsequent 0.50% increase and Powell’s explanation of why the Fed would stay the course with its current policy gave investors good reason to doubt that the BTC price will hold its current gains leading to the $370 million options expiring on December 16 .

Analysts and traders expect some kind of softening in the macroeconomic tightening movement. For those unaware, the Federal Reserve previously increased its balance sheet from $4.16 trillion in February 2020 to a staggering $8.9 trillion in February 2022.

Since the peak, the monetary authority has attempted to offload debt instruments and exchange-traded funds (ETFs), a process known as tapering. However, the previous five months resulted in less than $360 billion in assets.

Until there is clearer guidance on the economic policies of the world’s largest economy, Bitcoin traders are likely to remain skeptical of a sustained price move, regardless of its direction.

Bears placed most of their bets below $16,500

The open interest for the December 16 expiration of the options is $370 million, but the actual number will be lower since bears were led astray after the move to $18,000 on December 14. These traders completely missed the mark by placing bearish bets between $11,000 and $16,500, which seems unlikely given the market conditions.

The call-to-put ratio of 0.94 shows a balance between $180 million call (buy) open interest versus $190 million put (sell) options. Still, since Bitcoin is close to $18,000, most bearish bets will likely be worthless.

If Bitcoin remains above $18,000 at 08:00 UTC on December 16, virtually none of these put (sell) options will be available. This difference occurs because a right to sell Bitcoin at $17,000 or $18,000 is worthless if BTC trades above this level at expiration.

The Bulls could earn up to $155 million

Below are the four most likely scenarios based on current price action. The number of Bitcoin options contracts available on December 16 for call (bull) and put (bear) instruments varies, depending on the expiration price. The imbalance favoring each side constitutes the theoretical profit:

• Between $16,500 and $17,500: 1400 calls vs. 1200 putts. The net result is balanced between calls and putts.
• Between $17,500 and $18,000: 3700 calls vs. 100 putts. The net result favors the call (bull) instruments by $60 million.
• Between $18,000 and $19,000: 6200 calls vs. 0 putts. The net result favors the call (bull) instruments by $115 million.
• Between $19,000 and $19,500: 8100 calls vs. 0 putts. The net result favors the call (bull) instruments by $155 million.

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

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

FTX contagion continues to affect markets

During bear markets, it is easier to negatively affect the Bitcoin price due to the tone of the news flow and its outsized effect on the crypto market.

Recent negative crypto news includes reporting on a US court case that found an “unfair” trading advantage for Alameda Research, the market-making and trading firm linked to the bankrupt exchange FTX.

The US Commodities Futures Trading Commission claims Alameda Research had faster trade execution times and an exemption from the exchange’s “auto-liquidation risk management process”.

Through Dec. 16, the bulls’ best-case scenario calls for a pump above $19,000 to boost gains to $155 million. This seems unlikely given the ongoing regulatory risk and the risk of contagion. For now, bears will likely be able to push BTC below $18,000 and avoid a higher loss.