Bitcoin has experienced a dramatic loss of steam after failing to break through the $27,500 resistance on May 15, leaving bearish investors in a better position leading up to the May 19 expiry. Regulatory news has played a significant role in dampening investor appetite as governments look to increase control over the cryptocurrency sector.
Democrats in the United States legislature recently sought to reinforce the Securities and Exchange Committee’s (SEC’s) authority over crypto, arguing that nearly all digital assets are securities. This memo, which was made public on May 10, could be interpreted as a significant move towards greater regulation in the United States. Furthermore, SEC Chairman Gary Gensler has extended his authority to include network nodes which have been deemed to violate securities laws.
The United Kingdom’s Treasury Committee has recommended regulating retail crypto trading and investment activity as gambling, citing the principle of “same risk, same regulatory outcome” as justification. Treasury Committee Chair Harriett Baldwin has stated that Bitcoin (BTC) and Ethereum (ETH) account for two-thirds of the total market capitalization of crypto assets, both of which she argues are “unbacked.”
The $735 million Bitcoin weekly options expiry on May 19 might prove decisive in determining whether prices will fall below $26,000. Bearish investors may attempt to take advantage of the current regulatory environment and the sheer uncertainty surrounding the U.S. Treasury’s risk of running out of funds as the debt ceiling approaches. This scenario may help to explain why some Bitcoin traders have reduced their exposure over the past couple of weeks.
Data on Bitcoin options shows that bulls have been excessively optimistic, with the actual figure for the May 19 options expiry likely to be lower than the current $735 million in open interest; bulls have concentrated their wagers above $28,000. These traders became overly confident after Bitcoin reportedly gained 7% between May 12 and May 15, testing the $27,500 resistance.
The 0.42 call-to-put ratio reflects the divide between the $424 million in call (buy) open interest and the $312 million in put (sell) options for the May 19 options expiry. Unfortunately, if Bitcoin remains near $26,500 at 8 am UTC on May 19, only $30 million worth of these call (buy) options will be available, with the right to buy Bitcoin at $27,000 or $28,000 useless if BTC trades below these levels on expiry.
The four most likely scenarios based on the current price action are as follows:
Between $25,000 and $26,000: Bears in total control, profiting $190 million.
Between $26,000 and $27,000: The net result favours the put (sell) instruments by $80 million.
Between $27,000 and $28,000: The result is balanced between put and call options.
Between $28,000 and $29,000: The net result favours the call (bull) instruments by $140 million.
This crude estimate considers the put options used in bearish bets and the call options used in neutral-to-bullish trades. Indeed, it 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 However, this effect is challenging to quantify accurately.
Given the current situation, traders should exercise caution. Bears are currently in a better position for Friday’s weekly options expiry, which could potentially lead to more negative price movements. As such, traders should not rule out an eventual capitulation below $26,000.
Overall, Bitcoin’s success has been a mixed bag. While it remains an attractive opportunity for many investors, regulatory pressures, and market instability have dampened its appeal in the short term. Investors should be cautious as the cryptocurrency market adjusts to these new pressures, and it remains to be seen what impact these developments will have over the long term.
