Bitcoin bulls could skip today’s $730 million options expiry and focus on pushing the price to $40,000

The past few months have not been kind for bitcoin bulls. The continued comments from the US Federal Reserve (Fed) pointing to a plan to hike rates in 2022 are leading investors to seek protection in inflation-linked bonds.

The monetary regulator has signaled its intention to raise the benchmark interest rate significantly, and it will also gradually reduce its monthly debt purchases.

While some investors see Bitcoin’s digital scarcity as an inflation hedge, that doesn’t change its volatility. This, in turn, causes asset prices to move in tandem with the risk market.

 Source: Trade View

The chart above shows that Bitcoin price is moving similarly to US-listed retail companies as measured by the Russell 2000 stock market index. Unlike the S&P 500 or the Dow Jones Industrial Average, the benchmark excludes these tech giants. As a result, smaller companies are generally considered riskier and hit harder when investors fear a recession.

The negative performance didn’t deter investors, however, as the Canada-based Purpose Bitcoin ETF attracted more than $38 million in Bitcoin this Tuesday, its third-largest daily inflow to date. Currently, this Bitcoin exchange-traded fund holds 31,032 BTC, or $1.2 billion.

Regardless of investor sentiment, bitcoin bulls could face a $120 million loss if the price dips below $36,000 during Friday’s options expiration.

$730 million options contract expiring 4/2

Based on the number of Open Interest (OIs) expiring on Friday, Bitcoin bulls have been heavily betting between $40,000 and $44,000. These levels are looking bullish right now, but Bitcoin has been trading above $42,000 for the past 2 weeks.

 Source: Coinglass.com

Looking at the chart, the $430 million call options dominate over the $300 million put, but the 1.43 call-to-put ratio doesn’t really tell the whole story. For example, a 14% drop in price over the past 2 weeks has wiped out most bullish bets.

The purchase option gives the buyer the right to buy BTC at a fixed price on February 4 at 3:00 p.m. local time. However, if the market trades below this price, holding the derivative is worth nothing, so its value drops to zero.

So if Bitcoin stays below $37,000 at 3pm this afternoon, only $34 million of the call options will be available at expiry.

Bears will struggle to keep Bitcoin below $37,000

Here are the three most likely scenarios for an options expiration on Friday: The spread in favor of each side represents a theoretical gain. In other words, depending on the expiration price, the number of active buy and sell contracts will be different:

From $35,000 to $37,000: 950 calls versus 4,210 puts. The net result was $120 million in favor of a put (discount).

From $37,000 to $38,000: 1,650 calls versus 3,300 puts. The net result is another $60 million in favor of the computer.

From $38,000 to $39,000: 4,230 calls versus 1,710 puts. The net result is an equilibrium between call and put.

This estimate accounts for calls used in bullish bets and put options specifically for neutral to bearish trades. However, such oversimplification does not take into account more complex investment strategies.

Cows need $38,000 to balance the scales

A price of more than $38,000 was enough for bitcoin bulls to avoid a $120 million loss on the Feb. 4 option expiration. However, the same reasoning applies to bitcoin bears, as a BTC trade below $37,000 could easily earn them $120 million in profit.

Rather than wasting their efforts as they are now, bitcoin bulls should accelerate a sustained recovery to $40,000 and above given the near-term negative sentiment caused by tighter macroeconomic conditions. As a result, options market data is slightly skewed towards put options.

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