Bitcoin (BTC) saw a 16.5% correction between August 15 and August 19 as it tested the $20,800 support. While the drop is staggering, the $4,050 price difference is actually relatively insignificant, especially when one is responsible for bitcoin’s 72% annual fluctuation.
At the moment, the volatility of the S&P 500 stands at 31%, which is much lower, yet the index fell by 9.1% between June 8 and June 13. So, in comparison, the index of major US listed companies experienced a surprising move that was adjusted for the historical risk gauge.
At the beginning of this week, investor sentiment in the crypto space worsened after weak conditions in the Chinese real estate market forced the central bank to cut the five-year loan prime rate on August 21. It would force the US Federal Reserve to further tighten the economy, negatively impacting the S&P 500 index.
Regardless of the correlation between stocks and Bitcoin, which is currently at 80/100, investors tend to seek refuge in the US dollar and inflation-protected bonds when they fear a crisis or market crash. This move is known as a “journey to quality” and tends to increase selling pressure on all risk markets, including cryptocurrencies.
Despite the bears doing their best, Bitcoin was unable to break the $20,800 support level. This move explains why the $1 billion monthly bitcoin options expiring on August 26, which could benefit bulls despite the recent 16.5% loss in 5 days.
Most bullish bets are above $22,000
Bitcoin’s sharp correction after failing to break the $25,000 resistance on August 15 surprised the bulls as only 12% of their monthly expiry put (call) options were placed above $22,000. Thus, the bitcoin bears are in a better position even though they are placing fewer bets.
Bitcoin options collect open interest on August 26th. Source: CoinGlass
The broader view using the buy/buy ratio of 1.25 shows more bullish bets as the open interest for the call (buy) stands at $560 million against the $450 million put (call) options. However, with Bitcoin currently below $22,000, it is likely that most bullish bets will become worthless.
For example, if the Bitcoin price remains below $22,000 at 8:00 AM UTC on August 26, only $34 million worth of put (call) options will be available. This difference occurs because there is no use in the right to sell Bitcoin for less than $22,000 if it is trading above that level at expiration.
Bulls can secure a profit of $160 million
Here are the four most likely scenarios based on current price action. The number of options contracts available on August 26 for the buy (bull) and put (bear) instruments varies, depending on the expiration price. The imbalance in favor of each side constitutes the theoretical profit:
Between $20,000 and $21,000: 1,100 calls for 8,200 puts. The net result favors the Bears with $140 million.
Between $21,000 and $22,000: 1,600 calls for 6,350 points. The net result favors bears by $100 million.
Between $22,000 and $24,000: 5,000 calls for 4,700 points. The net result is balanced between bulls and bears.
Between $24,000 and $25,000: 7,700 calls for 1,000 points. The net result in favor of the bulls is $160 million.
This crude estimate takes into account buying options used in bullish bets and selling options exclusively in neutral to bearish trades. However, this oversimplification overlooks more complex investment strategies.
Holding $20,800 is critical, especially after the bulls liquidate in the futures market
Bitcoin bulls need to push the price above $22,000 on August 26 to balance the scales and avoid a potential $140 million loss. However, bitcoin bulls took $210 million of leverage from their long futures positions on August 18, so they are less inclined to push the price higher in the short term.
However, the most likely scenario on August 26 is the $22,000-24,000 range, which provides a balanced outcome between the bulls and the bears.
If the bears show some strength and BTC loses the critical support of $20,800, the $140 million loss in monthly expiration will be the least of their problems. In addition, the move would reverse the previous low of $20,800 on July 26, effectively breaking the 7-week uptrend.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.