Dec 10, 2020 10:52 PM | Joseph Young

Investors in the Bitcoin options market are seemingly anticipating the price of BTC to increase after the recent corrections. 


The price of Bitcoin has shown weak momentum throughout the two past weeks, and after struggling to see a continued rally past its all-time high near $20,000, it has pulled back sharply. On Binance, the price of BTC declined by around 9% from $19,167 to $17,650 from December 8 to 9. November also recorded a steep drop, on November 26, with the BTC price correcting to $16,188 on November 26, a 8.6% price drop that played out over just two days.


There are three potential reasons why the price of Bitcoin has recorded steep drops since November. First, the Bitcoin’s roughly $20,000 all-time high is acting as a heavy resistance area. Second, the number of Bitcoin deposits into exchanges from high-net-worth investors increased since the start of December. Third, the overall volume of the Bitcoin market has declined since hitting a peak on December 1.


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Although Bitcoin is seeing major pullbacks, investors in the options market are likely confident in its medium-term outlook. According to data from Deribit, the largest cryptocurrency options exchange by volume, investors in the options market aggressively accumulated Bitcoin when it dropped to the $16,000 region on November 26. Since then, Bitcoin has not fallen back to the $16,000 region, indicating that there was high buyer demand in that area.


Why the Bitcoin options market showing optimism is significant


The Bitcoin options market has been seeing a strong accumulation trend throughout November and December. When Bitcoin saw large corrections, such as the drop to $16,188 on Binance on November 26, buyer demand spiked across options exchanges. In the same period, retail exchanges like Coinbase also saw a considerable increase in buyer activity, leading analysts to speculate that the demand is primarily coming from investors in the U.S.


In the options market, there are two main types of contracts: calls and puts. Call contracts go up in value when the price of the asset appreciates. Put contracts rise in value when the price of the asset declines. Simply put, a call contract is a buy order, and a put contract is a sell order.


In late November, analysts at Deribit said that call sales dominated the market, which showed a clear buy-the-dip trend in the U.S. market. This trend suggests that buyers have already been buying aggressively since the $16,000 region, potentially anticipating a prolonged uptrend. The analysts said:


“Cascading derivatives liquidations [were] a catalyst to large option volumes, one day prior to 50k+ OI [open interest] expiry. Cumulative volumes [were] large, mainly fast money + risk management. But US holiday curtailed insto [institutional] trades until US pm+. Call sales dominate. Limited BTFD [buy the dip] evidence. Bulls already long.”


Although options contracts are also used by retail investors, professional traders typically use options due to their complexity compared to futures contracts. Deribit said that the consistent accumulation of Bitcoin by Time-weighted Average Price (TWAP) algorithms since Bitcoin passed the $13,000 price point has created additional confidence around Bitcoin. TWAP algorithms are often used by institutions and hedge funds to gradually buy into an asset. 


Retail exchange order books and volume trends demonstrate a similar trend. BlockTower trader Avi Felman found that there was a transfer from “weak hands” to “strong hands” on November 28, when the major Bitcoin correction occurred.


This accumulation period on Coinbase, the largest cryptocurrency exchange in the U.S. by trading volume, indicates two key trends. It shows that when the Bitcoin market saw a large spike in selling pressure in the recent weeks, it was absorbed by buyers in the U.S. It also signifies that both the options and retail market seem to be anticipating a long-term Bitcoin rally.


Why are investors continuously optimistic?


There are several major reasons why traders on both options and retail exchanges might be confident in the medium-term outlook of Bitcoin. The most obvious reason is the growing perception of Bitcoin as a store of value among institutional investors.


In the five months since MicroStrategy’s bold $425 million bet on Bitcoin, there has been a noticeable increase in institutional interest. Most recently, Laurence Fink, the CEO of BlackRock, the world’s biggest asset manager, said that Bitcoin could evolve into a global asset.


The acknowledgment of Bitcoin as a potential global asset by Fink was especially noteworthy because of Fink’s skeptical stance towards Bitcoin in the past. In October 2017, Fink dismissed the technology, saying “Bitcoin just shows you how much demand for money laundering there is in the world.”


The recent, positive comments from Fink come after other Wall Street barrons, such as Paul Tudor Jones, expressed optimism about the long-term trajectory of Bitcoin. The allure of Bitcoin as an inflation hedge that might also expose investors to significant growth over the next decade is likely stirring the demand for Bitcoin from institutions. This demand has been evident by the rise in trading activity across institution-focused platforms, which include the CME Bitcoin futures exchange and Graycsale’s Bitcoin Investment Trust.


As LongHash previously reported, pullbacks were expected because high time frame charts showed that the rally of Bitcoin was overextended to the upside. Pullbacks during a bull cycle may be healthy, because they can help a rally remain sustainable. Based on the positive market sentiment around Bitcoin, traders likely expect Bitcoin’s bull run to continue upwards after this consolidation phase.


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