Bitcoin (BTC) price jumped to $17,500 on Jan. 11, driving it to its highest level in three weeks. The price move gave bulls control of the $275 million BTC weekly options expiry on Jan. 13, as bears had placed bets at $16,500 and lower.
The recent move has permabulls and dip-buyers calling a market bottom and potential end to the bear market, but what does the data actually show?
Is the Bitcoin bear market over?
It might seem too pessimistic to say right now, but Bitcoin did trade below the $16,500 level on Dec. 30, and those bearish bets are unlikely to pay off as the options deadline approaches.
Investors’ main hope is the possibility of the U.S. Federal Reserve halting its interest rate increase in the first quarter of 2023. The Consumer Price Index (CPI) inflation report will be released on Jan. 12, and it might give a hint on whether the central bank’s effort to slow the economy and bring down inflation is achieving its expected results.
Meanwhile, crypto traders fear that an eventual downturn in the traditional markets could cause Bitcoin to retest the $15,500 low. For instance, Morgan Stanley’s chief investment officer and chief U.S. equity strategist, Mike Wilson, told investors on CNBC to brace for a winter downdraft and warned that the S&P 500 index is vulnerable to a 23% drop to 3,000. Wilson added, “Even though a majority of institutional clients think we’re probably going to be in a recession, they don’t seem to be afraid of it. That’s just a big disconnect.”
Bitcoin bears were not expecting the rally to $17,500
The open interest for the Jan. 13 options expiry is $275 million, but the actual figure will be lower since bears were expecting prices below $16,500. Bulls seem in complete control, even though their payout becomes much larger at $18,000 and higher.
The 1.18 call-to-put ratio reflects the imbalance between the $150 million call (buy) open interest and the $125 million put (sell) options. If Bitcoin’s price remains above $17,000 at 8:00 am UTC on Jan. 13, less than $2 million worth of these put (sell) options will be available. This difference happens because the right to sell Bitcoin at $16,500 or $15,500 is useless if BTC trades above that level on expiry.
$18,000 Bitcoin will give bulls a $130 million profit
Below are the four most likely scenarios based on the current price action. The number of options contracts available on Jan. 13 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
- Between $16,000 and $16,500: 100 calls vs. 2,700 puts. The net result favors the put (bear) instruments by $40 million.
- Between $16,500 and $17,500: 1,400 calls vs. 1,500 puts. The net result is balanced between bears and bulls.
- Between $17,500 and $18,000: 4,500 calls vs. 100 puts. The net result favors the call (bull) instruments by $75 million.
- Between $18,000 and $19,000: 7,200 calls vs. 0 puts. Bulls completely dominate the expiry by profiting $130 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 example, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price. But unfortunately, there’s no easy way to estimate this effect.
Related: Bitcoin gained 300% in year before last halving — Is 2023 different?
Bitcoin bears need to push the price below $16,500 on Jan. 13 to secure a potential $40 million profit. On the other hand, the bulls can boost their gains by slightly pushing the price above $17,500 to profit by $75 million.
The four-day rally totaled a 4.5% gain and liquidated $285 million worth of leverage short (sell) futures contracts, so they might have less margin required to subdue Bitcoin’s price.
Considering the uncertainty from the upcoming CPI inflation data, all bets are on the table, but bulls have decent incentives to try pushing Bitcoin price above $17,500 on Jan. 13.
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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.