Markets Rally After FOMC Meeting, But Bitcoin Bears Still Have Short-Term Advantage

Bitcoin (BTC) price has been on a downtrend since its all-time high of $69,000 on Nov. 10, when reports showed inflation in the U.S. was approaching 6.2 percent. While the news may be positive for non-inflationary assets, the U.S. Securities and Exchange Commission’s (SEC) rejection of the VanEck physical bitcoin exchange-traded fund (ETF) on Nov. 12 caught some investors off guard.

While rejections of ETF applications were widely expected, the reasons given by regulators may worry some investors. The SEC reasoned that market manipulation in the broader bitcoin market could not be avoided due to unregulated exchanges and the high volume of transactions in the Tether (USDT)-based stablecoin.

Analyzing the broader market structure is extremely important, especially given that investors are closely watching the meeting of the US Federal Reserve. Regardless of the imminent tapering of the Fed’s bond and asset buyback programs, Bitcoin’s movements have tracked U.S. Treasury yields over the past 12 months.

This tight correlation shows how decisive the Federal Reserve's monetary policy is for riskier assets, including Bitcoin. Additionally, the yield has fallen from 1.64 to 1.43 over the past three weeks, partially explaining the weakness seen in the cryptocurrency market.

Clearly, there are other factors at play, for example, the market pullback on November 26 was largely based on fears of new COVID-19 variants. Regarding the derivatives market, Bitcoin prices below $48,000 put bears in full control of Friday’s $755 million BTC options expiry.

At first glance, $470 million of call (buy) options overwhelms $285 million of put (sell) instruments, but the call-to-put ratio of 1.64 is deceptive as the 14% price increase since November 30 A drop could wipe out most bullish bets.

If the price of Bitcoin remains below $49,000 at 8:00 AM UTC on December 17, only $28 million worth of call (buy) options will be exercised at expiration. In short, the right to buy bitcoin has no value if it is trading below $49,000.

Bears happy with Bitcoin below $57,000

Here are the three most likely scenarios for Friday's $755 million option expiration. An imbalance in favor of each party represents a theoretical profit. In other words, depending on the expiration price, different numbers of call (buy) and put (sell) contracts become active.

• Between $45,000 and $47,000: 110 calls versus 2,400 puts. The net result was $105 million in favor of puts.
• Between $47,000 and $48,000: 280 calls versus 1,900 puts. The net result is $75 million in favor of puts.
• Between $48,000 and $50,000: 1,190 calls versus 1,130 puts. The net result is a balance between calls and puts.

This rough estimate assumes that calls are used for bullish bets, while puts are only used for neutral to bearish trades. However, this oversimplification ignores more complex investment strategies.

For example, a trader could sell put options, effectively gaining upside exposure to Bitcoin (BTC) above a certain price. But, unfortunately, there is no easy way to estimate this effect.

Bulls need $48,000 or higher to level things out

The only way for the bulls to avoid major losses on the December 17 expiration is to sustain Bitcoin’s price above $48,000. However, if the current short-term negative sentiment prevails, the bears could easily push the price down by 4% from the current $48,500, and could profit as much as $105 million if the price of Bitcoin stays below $47,000.

Right now, options market data is slightly in favor of put (sell) options, thus creating an opportunity for further negative pressure.