Bitcoin’s rally from March 16 to March 22, which saw a 17.5% rise, has surprised options traders who had bet on prices lower than $26,000. The sudden movement came as investors sought protection against the persistent inflation prevalent in many economies today and the ongoing banking crisis. The negative effects of near-zero interest rates between April 2020 and April 2022 were also a factor as investors used this information to profit from the $1.2 billion in BTC options set to expire on March 24.
The official consumer price index (CPI) released on March 22 showed an unexpected increase in inflation to 10.4% in February due to higher food prices in England. This outcome is likely to prompt the Bank of England to raise interest rates, which in turn increases the likelihood of a recession. A higher cost of capital is detrimental to businesses and families, but it is the only way to stem the rise in consumer prices. Meanwhile, existing home sales in the United States increased by 14.5% in February, following the first annual price decline in over a decade. The increase in sales suggests that the housing market has reached a price floor.
Investors’ fear of monetary debasement as governments inject capital to prevent banking sector contagion has spurred frantic demand for fixed-income instruments. The movement we see is not consistent with the macroeconomic scenario in which banks required emergency bailouts and major corporations were forced to lay off thousands of employees due to declining sales prospects. Every asset with a chance to profit from inflation is increasing, a typical sign of fiat currency debasement. Therefore, a portion of the recent gains seen in Bitcoin towards $28,000 is due to the weakening U.S. dollar.
If the fear of a recession continues to have a negative impact on risk markets, Bitcoin may struggle to maintain the price levels necessary for bulls to earn $380 million or more by March 24 when weekly options expire. The weekly BTC options expiry has $1.2 billion in open interest, but the actual figure will be lower because bears have concentrated their bets on Bitcoin trading below $26,000.
The number of options contracts available on March 24 for call (buy) and put (sell) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit. Below are the four most likely scenarios based on the current price action:
1. Between $25,000 and $26,000 – 7,400 calls vs. 5,500 puts. The net result favors the call (buy) instruments by $50 million.
2. Between $26,000 and $27,000 – 9,100 calls vs. 3,700 puts. The net result favors the call instruments by $140 million.
3. Between $27,000 and $28,000 – 12,700 calls vs. 800 puts. Bulls increase their advantage to $330 million.
4. Between $28,000 and $29,000 – 14,300 calls vs. 20 puts. Bulls’ advantage increases to $405 million.
Bears can only reduce their losses, so they are likely to throw in the towel and concentrate on the $3.8 billion monthly expiry on March 31. Based on the weekly options data, bulls are in a great position to profit at least $330 million.
Investors need to monitor numerous factors such as the US Treasury bond yield and stock market indices to make informed decisions about their investments in Bitcoin. The movement of these indices affects the value of assets such as Bitcoin. The consumer price index also gives an indication of the health of an economy, which in turn influences Bitcoin’s value.
The recent financial crisis has highlighted the need for alternative financial systems that are decentralized and not subject to large-scale shocks such as bank insolvencies. In this context, Bitcoin presents itself as a viable option for those seeking an alternative to traditional financial systems. As more investors seek protection against inflation and financial instability, the demand for Bitcoin is likely to increase, further driving up its price. However, investors need to keep in mind the risks associated with investing in Bitcoin and perform their due diligence before investing.