The price of Bitcoin (BTC) has been on a roller coaster ride over the past few weeks. After reaching a high of $21,370 on February 13, the price of Bitcoin dropped to its lowest level in more than three weeks, before regaining 6.3% of its value just two days later. This price recovery can be partially attributed to the U.S. Consumer Price Index data, which showed a 6.4% increase in year-over-year inflation in January.
The U.S. Federal Reserve is monitoring the overheated economy and is likely to raise interest rates in order to curb inflation. This could have an unintended consequence of increasing government debt costs, creating a bullish environment for scarce assets such as commodities, stocks, and cryptocurrencies.
The price gain of Bitcoin practically extinguished bear’s expectation for a sub-$21,500 option expiry on February 17, so their bets are unlikely to pay off as the deadline approaches. Bitcoin investors’ primary concern is the possibility of further impacts from regulators following the U.S. Securities and Exchange Commission ordering Kraken to halt its staking rewards program and the crackdown on Binance USD (BUSD) stablecoin issuing on February 13.
Even if the newsflow remains negative, bulls still can profit from February 17’s options expiry by keeping the BTC price above $22,500, but the situation can easily flip and favor bears. Bears were not expecting the $22,000 level to hold, and the open interest for the February 17 options expiry is $675 million. However, the actual figure will be lower since bears were expecting sub-$22,000 price levels.
The 1.12 call-to-put ratio reflects the imbalance between the $355 million call (buy) open interest and the $320 million put (sell) options. If Bitcoin’s price remains near $22,700 at 8:00 am UTC on February 17, only $24 million worth of these put (sell) options will be available. This difference happens because the right to sell Bitcoin at $21,000 or $22,000 is useless if BTC trades above that level on expiry.
Bulls aim for $23,000 to secure a $155 million profit. Below are the four most likely scenarios based on the current price action. The number of options contracts available on February 17 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:
Between $21,000 and $22,000: 700 calls vs. 5,500 puts. The net result favors the put (bear) instruments by $100 million.
Between $22,000 and $22,500: 1,800 calls vs. 1,500 puts. The net result is balanced between bears and bulls.
Between $22,500 and $23,000: 3,800 calls vs. 1,100 puts. The net result favors the call (bull) instruments by $60 million.
Between $23,000 and $24,000: 6,900 calls vs. 200 puts. The net result favors the call (bull) instruments by $155 million.
This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies. For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a specific price, but unfortunately, there’s no easy way to estimate this effect.
Bitcoin bulls need to push the price above $23,000 on February 17 to secure a potential $155 million profit. On the other hand, the bears’ best-case scenario requires a 3.5% dump below $22,000 to maximize their gains. Considering the negative pressure from regulators, bears have good odds of flipping the table and avoiding a loss of $60 million or larger on February 17.
More importantly, looking at a broader time frame, there is little room for the Fed to slow down the economy without spiraling the debt interest repayments out of control. February 17 will be an interesting display of strength between the short-term impact of a hostile crypto regulation environment versus Bitcoin’s long-term scarcity and censorship-resistance benefits.
The current market environment is a complex and uncertain one. The U.S. Federal Reserve is looking to raise interest rates in order to curb inflation, and the U.S. Securities and Exchange Commission is cracking down on crypto-related activities. This could have an impact on Bitcoin’s price in the short-term, but it is difficult to predict how the market will react over the long-term.
Bitcoin investors must weigh the risks of regulation against the long-term benefits of Bitcoin’s scarcity and censorship-resistance. On February 17, the bulls must push the price of Bitcoin above $23,000 in order to secure a potential $155 million profit. The bears, on the other hand, must push the price below $22,000 in order to maximize their gains.
No matter what happens on February 17, it is clear that the market is in a state of flux, and investors must be prepared for any outcome. It remains to be seen how the market will react to the current regulatory environment, but it is clear that the long-term benefits of Bitcoin’s scarcity and censorship-resistance will continue to be a major factor in determining its price.