Bitcoin price hangs in the balance — Friday’s $2.26B BTC options could result in more downside

Bitcoin’s price failed to break above $27,500 for the fourth time in 12 days on May 23. The subsequent 24-hour rejection down to $26,100 might seem small in absolute terms, but it potentially represents the lowest daily close in 68 days.

As the deadline for the Bitcoin monthly options expiry on May 26 approaches, the fate of the $2.26 billion open interest could determine whether the recent bearish trend will prevail, opening room for a correction down to $25,000 or lower.

Bitcoin price and the U.S. debt ceiling debate

Analysts argue that even if the United States government is able to raise the debt ceiling ahead of the June 1 deadline, risk-on assets such as stocks and cryptocurrencies could suffer, as the offer of new U.S. Treasurys would drain liquidity from the market.

The incentives for fixed income are in place as the one-year instruments return a 5.15% yield and the prospects of an economic crisis increase. Regardless of how the U.S. manages its debt issues, in periods of uncertainty, investors tend to seek shelter in the least risky asset classes.

For instance, U.S. money market fund assets hit a new record of $5.8 trillion this week as investors turned their focus to short-term debt securities, according to Reuters. Fixed-income mutual funds are a primary source of corporate and municipal funding and have faced $615 billion in net inflows so far this year.

Bitcoin’s 11% accumulated losses since May 6 might be precisely what bears need to succeed in May’s $2.26 billion monthly options expiry.

Bitcoin options: Bulls placed 84% of bets above $29,000

The open interest for the May 26 options expiry is $2.26 billion, but the actual figure will be lower since bulls were expecting a Bitcoin price above $29,000. These traders were caught by surprise as Bitcoin dropped 10.9% between May 6 and May 12.

The 0.38 put-to-call ratio reflects the imbalance between the $1.64 billion call (buy) open interest and the $630 million in put (sell) options.

However, if Bitcoin’s price remains near $26,500 at 8:00 am UTC on May 26, only $67 million worth of these call options will be available. This difference happens because the right to buy Bitcoin at $27,000 or $28,000 is useless if BTC trades above that level on expiry.

Bears aim for sub-$25,000 to secure a $270 million profit

Below are the four most likely scenarios based on the current price action. The number of options contracts available on May 26 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $24,000 and $25,000: 900 calls vs. 12,100 puts. The net result favors the put (sell) instruments by $270 million.
  • Between $25,000 and $26,000: 1,800 calls vs. 8,900 puts. The net result favors the put (sell) instruments by $180 million.
  • Between $26,000 and $27,000: 2,600 calls vs. 6,400 puts. Bears’ advantage is reduced to $100 million.
  • Between $27,000 and $28,000: 4,800 calls vs. 5,200 puts. The net result is balanced between call and put instruments.

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

For example, a trader could have sold a call option, effectively gaining positive exposure to Bitcoin above a specific price. Unfortunately, there’s no easy way to estimate this effect.

Bears could use profits to further pressure Bitcoin’s price

Bitcoin bulls will likely be satisfied if they manage to come out empty-handed by pushing the Bitcoin price above $27,000 during the expiry. Meanwhile, bears need a mere 2% price drop from $26,300 to secure a $180 million profit.

Given the bearish momentum for risk-on assets triggered by the U.S. debt ceiling standoff, Bitcoin bears are in a better position for the May $2.26 billion BTC monthly options expiry.

In short, an expiry price below $26,000 will boost bears’ appetite to further suppress Bitcoin’s price down to $25,000 or lower.