Bitcoin (BTC) experienced a 16.5% correction between August 15 and August 19 as it tested the $20,800 support. While the decline is surprising, in reality a price difference of $4,050 is relatively insignificant, especially considering Bitcoin’s 72% annualized volatility.
Currently, the volatility of the S&P 500 stands at 31%, which is significantly lower, but the index traded down 9.1% between June 8 and June 13. measure of historical risk.
Early this week, crypto investor sentiment soured after weaker conditions in China’s property markets forced the central bank to cut its five-year prime lending rate on August 21. Additionally, a strategist at investment bank Goldman Sachs said inflationary pressure would force the US Federal Reserve to tighten the economy further, which would negatively impact the S&P 500.
Regardless of the correlation between equities and Bitcoin, which is currently 80/100, investors tend to take refuge in the US dollar and inflation-protected bonds when they fear a crisis or a stock market crash. This move is known as the “flight to quality” and tends to add selling pressure to all risky markets, including cryptocurrencies.
Despite the bears’ best efforts, Bitcoin was unable to break below the $20,800 support. This move explains why the monthly $1 billion Bitcoin Options expiry on Aug. 26 could benefit bulls despite the recent 16.5% loss in 5 days.
Most bullish bets are above $22,000
Bitcoin’s sharp correction after failing to break through the $25,000 resistance on August 15 surprised bulls as only 12% of call (call) options for the monthly expiry were placed above $22,000 . Thus, Bitcoin bears are better positioned even though they have placed fewer bets.
A broader view using the call-to-put ratio of 1.25 shows more bullish bets as the call (buy) open interest stands at $560 million against the put (put) of 450 millions of dollars. Nonetheless, with Bitcoin currently sitting below $22,000, most bullish bets will likely become worthless.
For example, if the price of Bitcoin remains below $22,000 at 8:00 UTC on August 26, only $34 million of these put options will be available. This difference occurs because there is no point in the law selling Bitcoin below $22,000 if it is trading above that level at expiry.
The Bulls could get a profit of $160 million
Below are the four most likely scenarios based on the current price action. The number of option contracts available on August 26 for buy (bullish) and sell (bearish) instruments varies depending on the expiry price. The imbalance in favor of each side constitutes the theoretical gain:
- Between $20,000 and $21,000: 1,100 calls versus 8,200 puts. The net result favors the bears by $140 million.
- Between $21,000 and $22,000: 1,600 calls against 6,350 puts. The net result favors the bears by $100 million.
- Between $22,000 and $24,000: 5,000 calls versus 4,700 puts. The bottom line is balanced between bulls and bears.
- Between $24,000 and $25,000: 7,700 calls versus 1,000 puts. The net result favors the bulls by 160 million.
This raw estimate considers call options used in bullish bets and put options exclusively in neutral to bearish trades. Even so, this oversimplification fails to account for more complex investment strategies.
Holding $20,800 is essential, especially after the bulls have sold off in the futures market
Bitcoin bulls need to push the price above $22,000 on August 26 to balance the scales and avoid a potential loss of $140 million. However, Bitcoin bulls had $210 million in leveraged long positions liquidated on August 18, so they are less inclined to push the price higher in the short term.
That said, the most likely scenario for August 26 is the $22,000-$24,000 range offering a balanced outcome between bulls and bears.
If the bears show some strength and BTC loses the critical $20,800 support, the $140 million loss at monthly expiry will be the least of their problems. Additionally, this move would invalidate the previous low of $20,800 on July 26, thus breaking a 7-week uptrend.
The views and opinions expressed herein 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.