Options data shows that Bitcoin’s short-term uptrend is at risk if BTC falls below $23K

by · August 18, 2022

Bitcoin (BTC) briefly broke above $25,000 on August 15, but the surge lasted less than an hour and was followed by a 5% retrace over the next five hours. The resistance level proved tougher than expected, but may have given bulls false hope for the upcoming $335 million weekly options.

Investors’ fleeting optimism returned to a seller’s market on August 17 after BTC dumped and tested the $23,300 support. The negative move took place hours before the release of the Federal Open Markets Committee (FOMC) minutes from its July meeting. Investors are expecting some insight into whether the Federal Reserve will continue to raise interest rates.

The negative news flow accelerated on August 16 after a US federal court authorized the US Internal Revenue Service (IRS) to compel cryptocurrency broker SFOX to disclose the transactions and identities of clients who are US taxpayers. The same strategy was used to obtain information from Circle, Coinbase and Kraken between 2018 and 2021.

This movement explains why betting on Bitcoin prices above $25,000 on August 19th seemed like a sure thing a couple of days ago, and this would have stimulated bullish bets.

Bears did not expect BTC to go above $24,000

The open interest for the August 19 options expiration is $335 million, but the actual number will be lower since the bears were overly optimistic. These traders may have been fooled by the short-term dump to $22,700 on August 10 because their August options expiration bets extend down to $15,000.

Bitcoin Options Collect Open Interest for August 19th. Source: Coinglass

The call-to-put ratio of 1.29 shows the difference between $188 million call (buy) open interest and $147 million put (sell) options. Currently, Bitcoin is near $23,300, which means that most bullish bets will likely become worthless.

If Bitcoin’s price moves below $23,000 at 08:00 UTC on August 19, only $1 million worth of these call (call) options will be available. This difference occurs because a right to buy Bitcoin at $23,000 is useless if BTC trades below that level at expiration.

There is still hope for bulls, but $25,000 seems distant

Below are the three most likely scenarios based on current price action. The number of option contracts available on 19 August for buy (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $21,000 and $23,000: 30 calls vs. 2770 sets. The net result favors the put (bear) instruments by $60 million.
  • Between $23,000 and $25,000: 940 calls vs. 1,360 calls. The net result is balanced between bulls and bears.
  • Between $25,000 and $26,000: 3330 calls vs. 100 putts. The net result favors the call (bull) instruments by $80 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.

Related: Former Goldman Sachs banker explains why Wall Street is wrong about Bitcoin

Bears will try to pin Bitcoin below $23,000

Bitcoin bulls need to push the price above $25,000 on August 19 to earn $80 million. On the other hand, the bears’ best-case scenario requires pressure below $23,000 to maximize gains.

Bitcoin bulls just had $144 million in leveraged futures long positions liquidated on August 16, so they should have less margin to drive the price higher. With that said, bears have the upper hand to suppress BTC below $23,000 before the August 19 options expire.

The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trade involves risk. You should do your own research when making a decision.