Market Analysis

Bitcoin (BTC) has been trying to break the $60,000 resistance for the past 23 days. Generally, investors don’t seem too worried about this as they consider it a healthy consolidation period, and even recent analysis from JPMorgan Chase estimates that BTC price will reach $130,000

Even as most investors expect Bitcoin price to rise above $100,000, derivatives data shows $2.52 billion worth of ultra-bearish options from the $40,000 to $50,000 range?

At the moment, there are multiple signals that the crypto market is overheating. There is an 11% BTC price premium in South Korean markets, and this week Cointelegraph reported that there are 100 cryptocurrencies with a $1 billion market capitalization.

As a comparison, just two months ago, this figure stood at 51. The combined altcoin market capitalization surged to $800 billion from $450 billion in 60 days. Thus, buying protective put options makes sense, especially during these relatively low volatility periods.

Even though a 60% average historical volatility is not mild, this is the lowest the metric has been in four months. To understand how high this figure actually is, one can look at the historical volatility of iShares expanded tech-software ETF (IGV), which currently stands at 42%, its highest in eleven months.

Bitcoin’s high volatility causes options to trade at very high premiums, making buying downside protection quite costly. For example, a $44,000 put option for April 30 is currently trading at 0.007 BTC, equivalent to $411 at the current $58,800 price.

The total open interest between $40,000 and $52,000 put options totals 42,800 BTC contracts. This is equivalent to $2.52 billion at the current $58,800 price. Although there are multiple expiry dates involved, to put things in perspective, these 42,800 put options for the May 28 expiry would cost $56.4 million today.

The put-to-call ratio is balanced between $50,000 to $66,000

The data shows that some wealthy players are betting on ultra-bearish BTC options, but primarily as protection against the chance of downside given the state of the ‘overheating’ market. Traders should also factor in the bullish call options between the $80,000 and $100,000 strikes.

The ultra-bullish call options total 24,500 BTC contracts, equal to $1.44 billion in open interest. Had these been bought for the May 28 expiry, these would cost $30.4 million today.

Although looking at the extremes might paint a bearish picture, traders should remember that the call and put options between $50,000 and $66,000 are balanced. Therefore, at the moment, there is little incentive to drive the price either way regarding options markets.

Buying protective puts for an unexpected downside or ultra-bullish call options does not necessarily imply that investors are betting that these wild price swings will occur. Hedging a portfolio allows a trader to further increase their positions with less risk from high volatility.

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