Bitcoin retraces intraday gains as bears aim to pin BTC price under $18K

BTC bears are positioned to profit from this week’s Bitcoin options expiry, especially if price stays below $18,000. BTC  broke above $18,000 for the first time in 34 days, marking a 16.5% gain from the $15,500 low on Nov. 21. The move followed a 3% gain in the S&P 500 futures in three days, which reclaimed the critical 4,000 points support. While BTC price started the day in favor of bulls, investors anxiously awaited the U.S. Federal Reserve decision on interest rates, along with Fed chair Jerome Powell's remarks. The subsequent 50 basis point hike and Powell’s explanation of why the Fed would stay the course gave investors good reason to doubt that BTC price will hold its current gains leading into the $370 million options expiry on Dec. 16.

Analysts and traders expect some form of softening in the macroeconomic tightening movement. For those unfamiliar, the Federal Reserve increased its balance sheet from $4.16 trillion in February 2020 to a staggering $8.9 trillion in February 2022.

Since that peak, the monetary authority has been trying to unload debt instruments and exchange-traded funds (ETFs), a process known as tapering. However, the previous five months resulted in less than a $360 billion decline in the Fed's assets. Until there's a clearer guide on the economic policies of the world's largest economy, Bitcoin traders are likely to remain skeptical of a sustained price movement, regardless of the direction.

Bears placed most of their bets below $16,500

The open interest for the Dec. 16 options expiry is $370 million, but the actual figure will be lower since bears were caught off-guard after the move to $18,000 on Dec. 14. These traders completely missed the mark by placing bearish bets between $11,000 and $16,500, which seems unlikely given the market conditions. The 0.94 call-to-put ratio shows a balance between the $180 million call (buy) open interest against the $190 million put (sell) options. Nevertheless, as Bitcoin stands near $18,000, most bearish bets will likely become worthless.

If Bitcoin remains above $18,000 at 8:00 am UTC on Dec. 16, virtually none of these put (sell) options will be available. This difference happens because a right to sell Bitcoin at $17,000 or $18,000 is worthless if BTC trades above that level on expiry.

Bulls can profit up to $155 million

Below are the four most likely scenarios based on the current price action. The number of Bitcoin options contracts available on Dec. 16 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

• Between $16,500 and $17,500: 1,400 calls vs. 1,200 puts. The net result is balanced between calls and puts.
• Between $17,500 and $18,000: 3,700 calls vs. 100 puts. The net result favors the call (bull) instruments by $60 million.
• Between $18,000 and $19,000: 6,200 calls vs. 0 puts. The net result favors the call (bull) instruments by $115 million.
• Between $19,000 and $19,500: 8,100 calls vs. 0 puts. The net result favors the call (bull) instruments by $155 million.

This crude estimate considers the put options used in bearish bets and the call options exclusively in neutral-to-bullish trades. Even so, this oversimplification disregards more complex investment strategies. For example, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price, but unfortunately, there's no easy way to estimate this effect.

FTX contagion continues to impact markets

During bear markets, it's easier to negatively impact Bitcoin price due to the tone of newsflow and its outsized effect on the crypto market. Recent negative crypto news includes reporting on a U.S. court filing that showed an "unfair" trading advantage for Alameda Research, the market-making and trading company associated with bankrupt exchange FTX.

The U.S. Commodities Futures Trading Commission alleges that Alameda Research had faster trading execution times and an exemption from the exchange's "auto-liquidation risk management process."

Leading into Dec. 16, the bulls' best-case scenario requires a pump above $19,000 to extend their gains to $155 million. This seems improbable considering the lingering regulatory and contagion risks. For now, bears will likely be able to pressure BTC below $18,000 and avoid a higher loss.