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Bitcoin Investors Protect Against Even Lower Prices Ahead of New Year
Investors are buying options against falling prices ahead of a major expiry.
Updated May 11, 2023, 6:58 p.m. Published Dec 30, 2021, 8:54 a.m.
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Purchases of put options on bitcoin increased as the world’s largest cryptocurrency by market capitalization fell under the $46,000 level during Asian trading hours on Thursday. Bitcoin failed to break the $51,000 resistance level earlier this week, implying more sellers than buyers in current market conditions.
Tuesday and Wednesday saw upward of a combined $1.76 billion in options volume on crypto exchanges tracked by Glassnode. That’s not typical, as data from Glassnode shows most option volumes on crypto exchanges are generated on Friday, ahead of low-volume weekends.
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Nearly $1.7 billion in volume came from options powerhouse Deribit alone, and more than 46,000 puts were purchased for Dec. 31, the firm noted in a tweet.
1) Santa rally fading, BTC Dec31 46k Puts bought, anecdotal rumblings of Tradfi LP allocation audits into EOY, making for a captivating finale as Dec31 Options roll and completely detach into Jan bullishness: Jan7 50-53k Call spread, Jan28 55k Calls + Jan 1x2 Call spreads bought. pic.twitter.com/n0zVf65DMw
— Deribit Insights (@DeribitInsights) December 29, 2021
Options are hedging instruments that give the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. Puts allow investors to make profits on falling prices, while buying calls allows profits on an upward move.
The large put purchases on Tuesday and Wednesday came ahead of a $6 billion options expiry. A total of 129,800 options contracts are set to expire on Friday, according to data provided by analytics tool Skew.
Option expiries are usually marked with market volatility ahead of their expiry date, as investors hedge their positions with spot or futures purchases, leading to a change in market dynamics.
Data suggests that bitcoin tends to move toward the “max pain” point in the lead-up to expiration and sees a strong directional move in days after settlement. Those in financial circles refer to max pain as the point where option purchases stand to lose the most money.
Crypto research funds noted the current max pain point for bitcoin is $48,000 – a level the asset breached on Tuesday.
Bitcoin traded at about $46,926 at the time of writing, dropping over $3,500 after reaching a resistance level of $51,000 on Monday. The $46,500 level has acted as support in December. The next support level is at the $43,500 mark should bitcoin fail to hold current levels.
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