Market Analysis

Bitcoin’s (BTC) 32% weekly rally became the bears’ worst nightmare as Friday’s $860 million options expiry is approaching. After breaking the $54,000 level, over 99% of the bearish bets using put (sell) options are likely to become worthless.

Bears are in a dangerous position, particularly as Bloomberg’s Crypto Outlook pointed out that Bitcoin’s $50,000 resistance was about to flip support. Senior commodity strategist Mike McGlone cited such factors as increasing adoption along with a diminishing supply on exchanges.

Bloomberg also noted that traditional finance investors’ concerns surged after the protection against the possibility of a U.S. government default rose to its highest level in six years. Moreover, one-year credit-default swaps, or the cost to insure against a payment delay, have risen to 27 basis points from 4 basis points in mid-September.

Another crucial metric that certainly fueled this week’s bull run was Bitcoin’s hash rate, the estimated processing power backing the network miners. The capacity took a big blow in May as China vetoed coal-based energy use for mining cryptocurrencies. Then, in early June, the country decided to ban cryptocurrency mining for good, which temporarily took many miners offline, impacting the hash rate.

This week, the bulls picked up on these favorable conditions and pushed Bitcoin to its highest level since May 12 at $55,000. As for the $860 million options expiry on Oct. 8, the bears need a miracle to push the price below $50,000 to avoid significant losses.

As the above data shows, bears placed $400 million bets for Friday’s expiry, but it appears that they were caught by surprise as 99% of the put (sell) options are likely to become worthless.

In other words, if Bitcoin remains above $54,000 on Friday, only $2.7 million worth of neutral-to-bearish put options will be activated on the expiry. A right to sell (put option) Bitcoin at $50,000 becomes worthless if BTC trades above that price at 8:00 am UTC on Oct. 8.

Bulls and bears open interest is fairly balanced

The 1.16 call-to-put ratio represents the slight difference between the $465 million worth of call (buy) options versus the $400 million put (sell) options. Although favoring bulls, this broader view needs a more detailed analysis because some bets are implausible considering the current price.

Below are the four most likely scenarios for Friday’s expiry. The imbalance favoring either side represents the theoretical profit. In other words, depending on the expiry price, the quantity of calls (buy) and puts (sell) contracts becoming active varies:

  • Between $48,000 and $50,000: 3,515 calls vs.1,765 puts. The net result is $85 million favoring the call (bull) instruments.
  • Between $50,000 and $54,000: 6,270 calls vs. 735 puts. The net result is $290 million favoring the call (bull) instruments.
  • Between $54,000 and $56,000: 6,930 calls vs. 50 puts. The net result is $370 million favoring the call (bull) instruments.
  • Above $56,000: 7,600 calls vs. 0 puts. The net result is a complete dominance with bulls profiting $425 million.

This raw estimate considers call options being exclusively used in bullish bets and put options in neutral-to-bearish trades. However, investors might have used a more complex strategy that typically involves different expiry dates.

Bears are wrecked one way or another

To sum up, the Bitcoin bulls have absolute control of Friday’s expiry and enough incentives to keep the price above $54,000. On the other hand, bears need a 10% negative move below $50,000 to avoid the $370 million loss.

However, one must consider that during bull runs, like the one Bitcoin is in right now, the amount of effort a seller needs to put in to liquidate longs is immense and usually ineffective. Put simply, if no surprises come before Oct. 8, Bitcoin should continue its rally to higher prices.

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.