Bitcoin On Verge of ‘Violent’ Move After Surge Toward Record, Options Show

Mar 1, 2024

(Bloomberg) — After a breakneck run toward a record high this week, soaring demand for options appears to have left Bitcoin teetering on the verge of another parabolic run or a violent plunge.

Most Read from Bloomberg

Bitcoin has jumped around 20% since last Friday. The seemingly endless demand for US exchange-traded funds that hold the token has traders raising bets that the record price of almost $69,000, last seen during the Covid pandemic, will soon be surpassed. Bitcoin was mostly little changed at about $62,000 on Friday.

“All things are pointing towards if momentum keeps us going up, then we could see another violent move upwards,” said Luke Nolan, a research associate at digital-asset manager CoinShares. But even a small change in ETF flows could cause people to quickly deleverage, “it works both ways,” he said.

An influx of buyers for short-dated options has increased Bitcoin volatility to the highest since last year’s collapse of crypto-friendly Silicon Valley Bank. The notional value of the March 29 call and put options contracts has climbed to around $7 billion, far above the amount of any other contracts on a specific expiration date, according to data from Amberdata.

The jump in short-term options that have strike prices in a relatively small range is laying the groundwork for a what’s called a gamma squeeze, in which a change in price can trigger a rapid swing in the market. The open interest for the contracts with the March 29 expiration date is clustered at $65,000, $60,000 and $70,000, a short distance from the current spot market price, according to data from Deribit.

“We can see still a huge amount of OTM (out of money) calls,” Nolan said. “If Bitcoin pushes to levels near that, then in my opinion we could certainly get a squeeze.”

If a large amount of call options are bought, the sellers of the options, usually dealers or market makers, need to hedge their exposure. The usual way to hedge is to buy the underlying instrument so that they are not exposed to directional risk, Nolan said. If Bitcoin starts going up, the dealers will have to hedge further, thus buying more of the underlying token.

“This self-perpetuating loop can lead to a rapid price increase as dealers push the price up, causing them to have to buy more,” Nolan said.

While the ETFs have been driving the rally, crypto derivatives have been a major catalyst for the parabolic move. Institutional as well as retail investors have relied on futures and options given their capital efficiency and the ease of not dealing with risks associated with holding the cryptocurrency directly.

Deribit, one of the largest crypto options exchanges, saw record highs across multiple categories on Thursday. Total options open interest was $27 billion, while there was $12.4 billion in 24-hour trading volume.

“Over the past few days, we’ve observed significant activity in Bitcoin call options, particularly in the 60K to 70K range, accompanied by notable call skew,” said Luuk Strijers, chief commercial officer at Deribit. “With especially short-dated volatility remaining elevated, we anticipate continued demand for upside calls, albeit with potential bouts of turbulence.”

Bitcoin futures could add more downward pressure if the digital asset drops, since traders have been piling in leveraged long positions through such derivatives. That has pushed the funding rate for Bitcoin perceptual futures, one of the key indicators for leverage, much higher over the last few days. The derivative saw significant short liquidations in the lead-up to Bitcoin’s parabolic rise on Wednesday.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.

Leave a comment