Bitcoin shorts are benefiting from the current macroeconomic uncertainty and stand to pocket $270 million in profits if the BTC price drops below $25,000.
On May 23, the Bitcoin price failed to break above $27,500 for the fourth time in 12 days. The subsequent 24-hour drop to $26,100 may seem small in absolute terms, but it likely represents the lowest daily close in 68 days.
As Bitcoin’s monthly options expire on May 26, the fate of $2.26 billion in open interest could determine whether the recent bearish trend will prevail, opening the way for a downward correction to $25,000 or lower.
Bitcoin Price and the US Debt Ceiling Debate
Analysts believe that even if the U.S. government is able to raise the debt ceiling before the June 1 deadline, risky assets such as stocks and cryptocurrencies may be affected because the issuance of new U.S. Treasury bonds will drain liquidity from the market.
With the one-year instrument returning 5.15% and the prospect of an economic crisis growing, incentives for fixed income are in place. Regardless of how the U.S. handles its debt problems, during times of uncertainty, investors tend to seek refuge in the least risky asset class.
For example, U.S. money market fund assets hit a new record of $5.8 trillion this week as investors turned their attention to short-term debt securities, according to Reuters. Fixed-income mutual funds, a major source of funding for corporations and municipalities, have faced $615 billion in net inflows so far this year.
Bitcoin’s 11% cumulative loss since May 6 may be just what shorts need to succeed at the May $2.26 billion monthly options expiration.
Bitcoin options: Bulls place 84% of bets above $29,000
Open interest in options expiring on May 26 is $2.26 billion, but the actual number will be lower as bulls expect Bitcoin prices to exceed $29,000. Bitcoin's 10.9% drop between May 6 and May 12 surprised these traders.
The 0.38 call ratio reflects the imbalance between $1.64 billion of call (buy) open interest and $630 million of put (sell) options.
However, only $67 million worth of these call options would be available if the price of Bitcoin remains around $26,500 at 8:00 AM UTC on May 26. This discrepancy occurs because the right to buy Bitcoin at $27,000 or $28,000 would be useless if BTC is trading above that level at expiration.
Bears aim below $25,000 to secure $270 million in profits
Below are the four most likely scenarios based on current price action. The number of options contracts available for the call (bull) and put (bear) instruments on May 26 will vary, depending on the expiration price. The imbalance in favor of each party constitutes the theoretical profit:
Between $24,000 and $25,000: 900 calls vs. 12,100 puts. The net result favors the put (sell) instrument by $270 million.
Between $25,000 and $26,000: 1,800 calls vs. 8,900 puts. The net result favors the put (sell) instrument by $180 million.
Between $26,000 and $27,000: 2,600 calls vs. 6,400 puts. The Bears’ advantage is reduced to $100 million.
Between $27,000 and $28,000: 4,800 calls and 5,200 puts. The end result is a balance between bullish and bearish instruments.
This rough estimate takes into account call options used in bullish bets and put options used only in neutral to bearish trades. Even so, this oversimplification ignores more complex investment strategies.
For example, a trader could sell a call option, effectively gaining positive exposure to Bitcoin above a certain price. Unfortunately, there is no easy way to estimate this effect.
Short sellers can use profits to further drive down Bitcoin’s price
Bitcoin bulls may be satisfied if they walk away empty-handed by pushing the price of Bitcoin above $27,000 during the expiration period. Meanwhile, bears would need the price to drop just 2% from $26,300 to make a profit of $180 million.
Bitcoin shorts are in a better position heading into the May $2.26 billion BTC monthly options expiration, given the bearish momentum in risk assets sparked by the U.S. debt ceiling impasse.
In short, an expiry price below $26,000 will boost the appetite of bears to further push the Bitcoin price down to $25,000 or lower.