The upcoming $1.9 billion Bitcoin monthly options expiry on Aug. 25 is crucial in determining whether the $26,000 support level will hold. One could attribute the recent sell-off in the cryptocurrency market to the SEC’s delay in deciding on spot Bitcoin exchange-traded funds, but there is also the macroeconomic perspective.
If the Federal Reserve is successful in curbing inflation, it is likely that the trend of a stronger U.S. dollar will continue. This was evident as the U.S. Dollar Index (DXY) reached its highest level in 76 days on Aug. 22.
To avoid a potential loss of $380 million due to the monthly Bitcoin (BTC) options expiry, Bitcoin bulls must ensure that Bitcoin’s price remains above $27,000 by Aug. 25.
Bitcoin bears will benefit from the threat of strict regulation
Cryptocurrency bulls have recently faced regulatory challenges. This is evident with the lawsuits involving the top two cryptocurrency exchanges, Binance and Coinbase, against the SEC. Additionally, the SEC is appealing against the initial victory celebrated by Ripple.
In addition to these developments, Bitstamp has decided to suspend staking services for U.S.-based clients. An important concern in the ongoing U.S. regulatory landscape is the classification of Ether (ETH) as a commodity or a security.
Furthermore, Binance has announced the suspension of its crypto debit card offerings in Latin America and the Middle East. This decision comes after allegations of Binance also suspending euro withdrawals and deposits through SEPA on Aug. 20. The exchange clarified that there is no set timeline for when the service will be reinstated.
Data shows excessive optimism among Bitcoin bulls
The open interest for the options expiry on Aug. 25 is $1.9 billion. However, it is projected that the final amount will be lower as certain traders anticipate price levels reaching $29,000 or higher. The unexpected 12% correction in Bitcoin’s price from Aug. 14 to Aug. 19 caught bullish investors off guard, as shown in the Deribit Bitcoin options interest chart.
The 0.56 put-to-call ratio indicates an imbalance between the $1.2 billion in call (buy) open interest and the $685 million in put (sell) options. However, if Bitcoin’s price remains near $26,500 at 8:00 am UTC on Aug. 25, only $35 million worth of these call (buy) options will be available. This difference occurs because the right to buy Bitcoin at $27,000 or $28,000 is useless if BTC trades below that level on expiry.
Bitcoin bears aim for sub-$26,000 to maximize their gains
Here are the four most likely scenarios based on the current price action. The number of options contracts available on Aug. 25 for call (buy) and put (sell) instruments varies depending on the expiry price. The imbalance favoring each side determines the theoretical profit.
This crude estimate disregards more complex investment strategies. For example, a trader could have sold a call option, gaining negative exposure to Bitcoin above a specific price. Unfortunately, estimating this effect is not easy.
Between $25,000 and $26,000: 100 calls vs. 15,100 puts. The net result favors the put instruments by $380 million.
Between $26,000 and $27,000: 1,400 calls vs. 11,000 puts. The net result favors the put instruments by $250 million.
Between $27,000 and $28,000: 4,000 calls vs. 8,400 puts. The net result favors the put instruments by $110 million.
Between $28,000 and $29,000: 6,000 calls vs. 5,300 puts. The net result is balanced between call and put options.
Note that in order for the bulls to level the playing field before the monthly expiry, they must achieve a 6% price increase from $26,400. In contrast, the bears only need a modest 2% correction below $26,000 to secure a $380 million advantage on Aug. 25.
Given Bitcoin’s repeated drops below the $26,000 support level from Aug. 21 to Aug. 23, it would not be surprising if this level is tested again before the options expiry. Furthermore, considering the current cryptocurrency regulatory landscape, there is minimal incentive for Bitcoin bulls to reverse the prevailing bearish momentum after the $1.9 billion monthly options expiry.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.