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Luke Nolan, research assistant at CoinShares, stated: "Everything suggests that if momentum continues to drive us higher, then we may see another violent leg up." But even slight changes in ETF flows could prompt rapid deleveraging, "it's a two-way street," he said.
The influx of short-term option buyers has pushed Bitcoin's volatility to its highest level since the collapse of the crypto-friendly Silicon Valley bank last year. Data from Amberdata shows that the nominal value of call and put option contracts on March 29 has surged to around $7 billion, surpassing the amount of any other contract for a specific expiration date.
The rise of short-term options with relatively narrow strike prices has laid the groundwork for so-called gamma squeezes, where price changes can trigger rapid market movements. According to Deribit's data, open interest in contracts expiring on March 29 is concentrated around $65,000, $60,000, and $70,000, not far from the current spot market price.
"We can still see a lot of OTM (out-of-the-money) calls," Nolan said. "If Bitcoin goes close to these levels, then I think we will definitely see squeezing."
If a large number of call options are bought, the options sellers (typically dealers or market makers) need to hedge their risk exposure. Nolan said that the usual method of hedging is buying the underlying asset so they won't face directional risk. If Bitcoin starts to rise, dealers will have to hedge further by buying more of the underlying tokens.
"This self-perpetuating loop could lead to rapid price increases as dealers bid up prices, forcing them to buy more products," Nolan said.
While ETFs have been driving the rally, cryptocurrency derivatives have been the primary catalyst for parabolic moves. Both institutional and retail investors rely on futures and options due to their capital efficiency and the convenience of not having to deal with the direct risks of holding cryptocurrencies.
Deribit, one of the largest cryptocurrency options exchanges, saw record highs across several categories on Thursday. Open interest in options totaled $27 billion, with a 24-hour trading volume of $12.4 billion.
Luuk Strijers, Chief Commercial Officer at Deribit, stated: "Over the past few days, we have observed significant activity in Bitcoin call options, particularly in the 60K to 70K range, accompanied by a notable skew towards call options." "Due to continued high short-term volatility, we expect demand for the upside to persist despite potential turmoil."
If digital assets decline, Bitcoin futures could add further downside pressure as traders have been accumulating leveraged long positions through such derivatives. This has led to a substantial increase in the funding rate for Bitcoin's perception futures, one of the key indicators of leverage, in the past few days. There were significant short liquidations in this derivative before Bitcoin's parabolic rise on Wednesday." |
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Post time 11-3-2024 07:15:09