Institutions Not Worried About Bitcoin Dropping Below $40K, Options Data Shows


Despite Bitcoin’s rapid drop of $ 3,000 from its new record highs on Sunday, institutions appear confident about the cryptocurrency’s long-term prospects.

The cryptocurrency fell to $ 47,790 on Monday after failing to cross the $ 50,000 psychological barrier over the weekend. So far, however, there has been little evidence of preparation for deeper losses in the options market.

“There is still no institutional long-term protection. In fact, funds continue to use the sale of put options expiring from June to December for strikes below USD 40,000, ”Deribit Insights explained in a tweet thread, explaining the reasons for the price decline and the resulting changes in option market flows.

A put option gives the holder the right, but not the obligation, to sell the underlying asset on or before a specified date at a specified price. Investors buy puts, pay a premium when they anticipate a fall in prices and sell (write) put options, collect a premium when they anticipate price consolidation or a rally.

Currently, major investors are still selling long-term puts below $ 40,000, which shows that they don’t expect any prolonged / sustained drop in prices below $ 40,000.

The lack of an implied volatility spike on the decline from $ 49,000 to $ 46,000, as well as the increase to $ 48,000 suggests “comfort and consolidation” in the mid-trading range of $ 40,000 to $ 50,000, Deribit Insights said.

“The strategy of selling the downside puts is twofold: getting premium (theta), which is higher at higher volatilities, and also because traders do not believe that a crash will happen before this expires,” said Shaun Fernando, director of risk and product at Deribit, the largest exchange for crypto derivatives in terms of trading volume.

The six-month put-call offset, which measures the costs of puts in relation to calls, remains anchored in the negative area and supports Deribit’s assessment. The three month metric is also trading below zero, indicating a bullish bias.

Bitcoin: put-call offset

Source: Skew

If the institutes had bought long-term puts in order to position themselves for a deeper price decline, the six-month put-call offset would have turned out to be positive. In addition, a stronger put-buying in the expiration series from June to December would have increased the long-term implied volatility (IV), a measure of the expectations of investors with regard to price turbulence.

Bitcoin implied volatilities

Source: Skew

The six-month IV has decreased from 104.6% to 99.6% in the last 24 hours, while the one-month and three-month IV lines follow similar trends.

Selling options (put or call) is a limited profit, unlimited loss strategy that is generally better left to institutions with high capital supply. Profits are limited to the amount of the premium received and the loss can be endless as an asset can theoretically go to zero or go up to infinity.

See Also: 3 Reasons Bitcoin’s Price Has Just Dropped $ 3,000