Bitcoin price breaks from range with drop below $28K, and options tilt toward BTC bears

On Aug. 16, Bitcoin closed below $29,000 for the first time in 56 days. Analysts quickly pointed to this week’s Federal Open Market Committee minutes, which expressed concerns about inflation and the need to increase interest rates, as the likely cause.

Despite the immediate reasons for the drop, the upcoming $580 million Bitcoin (BTC) options expiry on Friday favors the bears. They could potentially make a $140 million profit on Aug. 18, adding to the downward pressure on Bitcoin and complicating BTC’s search for a bottom.

Federal Reserve minutes did not impact traditional markets

On Aug. 16, Federal Reserve Chair Jerome Powell emphasized the 2% inflation target. This pushed the U.S. 10-year Treasury yield to its highest level since October 2007, prompting investors to shift away from riskier assets like cryptocurrencies in favor of cash positions and companies that are well prepared for such a scenario.

Notably, Bitcoin had already fallen to $29,000, its lowest point in nine days, prior to the release of the Fed minutes. The impact of the minutes was limited, especially considering the 10-year yield had been rising, indicating skepticism about the Fed’s ability to control inflation.

Additionally, on Aug. 17, S&P 500 index futures only dropped by 0.6% compared to their pre-event level on Aug. 16. During the same time, WTI crude oil gained 1.7%, while gold traded down 0.3%.

Concerns about China’s economy might have also contributed to the decline. The country reported lower-than-expected retail sales growth and fixed asset investment, potentially affecting the demand for cryptocurrencies.

Although the exact causes of the price drop remain uncertain, there’s a possibility that Bitcoin could reverse its trend after the weekly options expiry on Aug. 18.

Bitcoin bulls cast the wrong bet

Between Aug. 8 and Aug. 9, the price of Bitcoin briefly crossed the $29,700 mark, sparking optimism among traders using options contracts.

Deribit Bitcoin options aggregate open interest for Aug. 18. Source: Deribit

The 0.57 put-to-call ratio reflects the difference in open interest between the $365 million call (buy) options and the $205 million put (sell) options. However, the outcome will be lower than the $570 million total open interest since the bulls were caught by surprise with the latest price drop below $29,000.

For example, if Bitcoin’s price trades at $28,400 at 8:00 am UTC on Aug. 18, only $3 million worth of call options will be accounted for. This distinction arises from the fact that the right to purchase Bitcoin at $27,000 or $28,000 becomes invalid if BTC trades below those levels upon expiration.

Below are the three most likely scenarios based on the current price action. The number of options contracts available on Aug. 18 for call (buy) and put (sell) instruments varies depending on the expiration price. The imbalance favoring each side constitutes the theoretical profit:

• Between $26,000 and $28,000: 100 calls vs. 5,300 puts. The net result favors the put (sell) instruments by $140 million.
• Between $28,000 and $28,500: 100 calls vs. 3,900 puts. The net result favors the put (sell) instruments by $60 million.
• Between $28,500 and $29,500: 600 calls vs. 1,300 puts. The net result favors the put (sell) instruments by $20 million.

Given the growing concern among investors about an upcoming economic slowdown due to actions taken by central banks to control inflation, it’s likely that Bitcoin bears will maintain their advantage. This trend isn’t limited to the upcoming Friday expiry and is expected to continue, especially since the chances of the BTC bulls’ primary short-term goal — the approval of a spot exchange-traded fund — are quite slim.

As a result, those on the bullish side find themselves in a tough spot. The success of their call (buy) options relies on Bitcoin’s expiry price going above $28,500. The most likely scenario, where bears could walk away with a favorable outcome of $140 million, suggests the potential for a further correction in Bitcoin’s price.