Bitcoin’s rapid ascent toward its all-time high has triggered a surge in demand for options, indicating the cryptocurrency is poised for either another explosive rally or a sharp downturn. With Bitcoin surging around 20% since last Friday, traders are betting that the previous record of nearly $69,000, reached during the Covid pandemic, could soon be eclipsed. As of Friday, Bitcoin was trading near $62,000, showing minimal movement.
Luke Nolan, a research associate at CoinShares, notes that current momentum suggests the potential for another significant upward move. However, he warns that any shift in exchange-traded fund (ETF) flows could prompt rapid deleveraging, leading to price volatility in both directions.
The influx of buyers into short-term options has propelled Bitcoin volatility to levels not seen since the collapse of Silicon Valley Bank last year. The notional value of call and put options contracts expiring on March 29 has soared to approximately $7 billion, surpassing all other contracts for a specific expiration date, according to data from Amberdata.
This surge in short-term options, particularly those with strike prices in a narrow range, sets the stage for a gamma squeeze, wherein a price change triggers a swift market swing. Open interest for contracts expiring on March 29 is concentrated at $65,000, $60,000, and $70,000, close to the current spot market price, according to Deribit data.
Nolan highlights the presence of a substantial number of out-of-the-money (OTM) calls, suggesting the potential for a squeeze if Bitcoin approaches those levels.
In the options market, large purchases of call options require sellers, typically dealers or market makers, to hedge their exposure by buying the underlying asset. This hedging mechanism can lead to a self-reinforcing cycle, wherein rising prices prompt further hedging and additional buying, propelling prices even higher.
While ETFs have been instrumental in driving Bitcoin’s rally, derivatives have also played a significant role. Institutional and retail investors have turned to futures and options for their capital efficiency and to avoid the risks associated with directly holding the cryptocurrency.
Deribit, a major crypto options exchange, witnessed record-high activity across various metrics on Thursday, indicating sustained interest in Bitcoin options trading.
The surge in leveraged long positions via Bitcoin futures could exacerbate downward pressure if the digital asset corrects. The funding rate for Bitcoin perpetual futures, a key indicator of leverage, has surged in recent days, leading to significant short liquidations ahead of Bitcoin’s latest surge.
