Bitcoin continues to show resilience, maintaining its position above $40,000 as the final quarter of 2023 draws to a close. This is a crucial moment for the cryptocurrency market, as the last quarterly options expiry of the year will take place on Friday, December 29.
Options are contracts that give buyers the right, but not the obligation, to buy or sell an underlying asset at a specified price and time. They are often used by traders and investors to hedge their risks or speculate on future price movements. The expiry of these contracts can have a significant impact on the price of the underlying asset, as well as the overall market sentiment and volatility.
According to data from Skew, a crypto analytics platform, there are about $2.7 billion worth of Bitcoin options contracts expiring on Friday, representing about 15% of the total open interest in the market. The majority of these contracts are concentrated around the $40,000 strike price, which means that many buyers and sellers have bet on Bitcoin staying above or below this level by the end of the quarter.
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If Bitcoin remains above $40,000, most of these contracts will expire worthless, resulting in a loss for the sellers and a gain for the buyers. However, if Bitcoin falls below $40,000, the opposite will happen, and the sellers will profit while the buyers will lose.
The expiry of these options contracts can also create incentives for market participants to manipulate the price of Bitcoin in their favor, especially in the hours leading up to the expiry. For example, if a large seller of options wants to make their contracts expire in the money, they might try to push the price of Bitcoin down by selling large amounts of spot or futures contracts.
Conversely, if a large buyer of options wants to make their contracts expire in the money, they might try to boost the price of Bitcoin up by buying large amounts of spot or futures contracts. These actions can create sudden spikes or drops in the price of Bitcoin, as well as increased volatility and liquidity.
Therefore, traders and investors should be aware of the potential risks and opportunities that the quarterly options expiry can bring to the Bitcoin market. While it is impossible to predict how the market will react to this event, some indicators can help gauge the market sentiment and expectations.
For example, one can look at the implied volatility of Bitcoin options, which measures how much the market expects the price of Bitcoin to fluctuate in the future. A high implied volatility suggests that the market anticipates a large price movement, while a low implied volatility suggests that the market expects a stable price.
Another indicator is the skew of Bitcoin options, which measures how much more expensive it is to buy a call option (a bet on a price increase) than a put option (a bet on a price decrease). A positive skew indicates that the market is more bullish than bearish, while a negative skew indicates that the market is more bearish than bullish.
As of December 28, 2023, Skew data shows that the implied volatility of Bitcoin options is around 70%, which is slightly lower than its historical average of 75%. This implies that the market is not expecting a very large price movement from the options expiry.
However, this could change quickly depending on how the price of Bitcoin behaves in the next few days. The skew of Bitcoin options is currently around 5%, which is slightly positive and indicates that there is more demand for call options than put options. This suggests that the market is slightly bullish on Bitcoin and expects it to stay above $40,000 by Friday.
Bitcoin remains well supported by its fundamentals and technical, holding above $40,000 as 2023 comes to an end. However, traders and investors should be prepared for some potential volatility and price manipulation as the last quarterly options expiry of the year approaches. The expiry of these contracts can create both risks and opportunities for those who are involved in or interested in the Bitcoin market.
By using various indicators and tools, such as implied volatility and skew, one can get a better sense of how the market is feeling and what it is expecting from this event.