Bitcoin And Ethereum held their ground amid a major options expiration event this morning.
The major cryptocurrency rose 1% early Friday morning, while ETH jumped 1.6%.
Bitcoin is now trading at $26,509, down 11% in the past 30 days. During the same period, the second-largest cryptocurrency by market cap fell 4.6%.
Today, Bitcoin options on Deribit expired this morning with a notional value of $2.26 billion and $1.25 billion for Ethereum, inducing uncertainty in the market.
The notional value refers to the total number of outstanding options orders in the market that have not yet expired.
The Bitcoin options market had a put-call ratio of 0.44. Similarly, for ETH, each put option had two open call options open. This suggests that traders were mostly holding bullish positions, which is likely why the price reacted negatively ahead of expiry.
A call option contract is a financial derivative that gives the holder the right, but not the obligation, to buy a specific asset – in this case, Bitcoin – at a predetermined price. A put option gives its holder the right to sell.
When an investor buys a call option, they are essentially betting that the price of the underlying asset will exceed the strike price before the option expires. The strike price represents the predetermined price at which the option is purchased.
For example, a call option in May for a strike price of $27,000 would mean that for the buyer to make a profit, the price must be above $27,000 when it expires.
Usually, the market tends to fluctuate towards the maximum pain point near the expiration of the option. The maximum pain point for today’s expiry event was $27,000 for Bitcoin and $1,800 for Ethereum, roughly current prices.
The maximum pain point in the options market refers to the price level at which option buyers will suffer maximum losses.
Bitcoin, Ethereum low liquidity sets in
The current conditions of low market liquidity were expected to have exacerbated the impact of the options expiration event.
Bitcoin’s liquidity dried up in the second quarter of 2023 due to events such as the end of Binance’s free trading program, banking crises, and macroeconomic issues like the ongoing state debt ceiling debate. -United.
Cryptography research center Jarvis Labs co-founder Ben Lilly measured the drop in liquidity using the Cumulative Volume Delta (CVD) metric for spot and futures markets. CVD measures the cumulative change in the volume of buy and sell orders as the price moves.
It is used to analyze volume flow and can provide information about the strength or weakness of a trend or price movement.
Lilly found that spot CVD has declined significantly since mid-April, indicating that traders show no interest in driving prices up or down.
In addition to the options expiration event, Lilly added that once the May contracts expire, the market’s attention will shift to June, which is currently showing a peak pain level of $24,000 for Bitcoin and $1,600 for Ethereum.
“Once this May unwind and contracts expire, we are now looking at June and the pattern should change, indicating a pullback towards $24,000,” Lilly wrote.
Biyond Capital lead trader Nathan Batchelor echoed the analysis above.
“In low volume, low liquidity trading conditions such as now, it is also possible that option stocks could drive price volatility,” he said. Decrypt. “Most high-volume puts are around $25,250, so watch for more downside Friday if $25,850 is breached.”
Deribit analysts agreed on the possibility of an episode of volatility based on the historically low reading of short-term implied volatility, which preceded a market rally in January 2023.
Implied volatility is a measure of market expectations regarding future volatility or price movements of an underlying asset.
Deribit Chief Commercial Officer Luuk Strijers said Decrypt that if the previous example led to a rise, it “could also have been a stock market crash”.
He expects short-term volatility to rise and narrow the difference with long-term implied volatility to restore the sentiment that “Bitcoin’s lower volatility is here to stay” before traders can begin with confidence. long-term accumulation or distribution.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.