Here's Why Bitcoin Bulls Will Defend $42,000 Ahead of Friday's $3.3 Billion BTC Options Expiration

Over the past two months, Bitcoin ( BTC ) adhered to an ascending triangle formation, bouncing off its support and resistance lines multi...

Over the past two months, Bitcoin (BTC) adhered to an ascending triangle formation, bouncing off its support and resistance lines multiple times. While this may sound positive, the price is still down 11% year-to-date. For comparison, the Bloomberg Commodity Index (BCOM) gained 29% over the same period.

Bitcoin/USD 1-day chart at FTX. Source: Trading View

The broader commodity index benefited from higher prices for crude oil, natural gas, corn, wheat and lean hogs. Meanwhile, the total cryptocurrency market cap was unable to break through the $2 trillion resistance level and currently stands at $1.98 trillion.

In addition to 40-year record inflation in the United States, a $1.5 trillion expense bill was approved on March 15, enough to fund the government until September. Deteriorating macroeconomic conditions put pressure on the supply curve, which in turn pushed commodity prices even higher.

For these reasons, cryptocurrency traders are increasingly concerned about the US Federal Reserve rate hike expected throughout 2022 to contain inflationary pressures.

If global economies slip into recession, investors will seek protection from US Treasuries and the US dollar itself, moving away from risky asset classes like cryptocurrencies.

The bulls placed their bets at $100,000 and above

Open interest for the March 25 Bitcoin options expiry is $3.34 billion, but the actual figure will be much lower as the bulls were overly bullish.

These traders may have been fooled by the short-lived pop at $45,000 on March 2, as their bets for the March 25 options expiration extend beyond $100,000.

Even Bitcoin’s recent rally above $42,000 took the bears by surprise, as only 16% of March 25 bearish option bets were placed above this price level.

Bitcoin options aggregate open interest for March 25. Source: CoinGlass

The call-to-put ratio of 1.75 shows larger bets as open call (buy) interest stands at $2.13 billion versus $1.21 billion for put options ( sale). Nonetheless, as Bitcoin stands near $42,000, most bearish bets will likely become worthless.

For example, if the price of Bitcoin remains above $42,000 at 8:00 UTC on March 25, only $192 million of these put options will be available. This difference occurs because there is no point in a right to sell Bitcoin at $40,000 if it is trading above that level at expiry.

Bulls target $280 million profit

Below are the three most likely scenarios based on the current price action. The number of option contracts available on March 25 for buy (bullish) and sell (bearish) instruments varies depending on the expiry price. The imbalance in favor of each side constitutes the theoretical gain:

  • Between $39,000 and $42,000: 6,300 calls against 6,300 puts. The net result is balanced between buy (bullish) and sell (bearish) instruments.
  • Between $42,000 and $44,000: 8,700 calls against 4,600 puts. The net result favors the bulls by 175 million.
  • Between $44,000 and $45,000: 10,600 calls versus 4,300 puts. The bulls increase their earnings to $280 million.

This raw estimate considers put options used in bearish bets and call options exclusively in neutral to bullish trades. Even so, this oversimplification fails to account for more complex investment strategies.

For example, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price, but unfortunately there is no easy way to estimate this effect.

Related: Terra may be set to repeat the $125 million BTC buy that sparked Bitcoin’s run to $43.3,000

Bears will want to pin BTC below $42,000

Bitcoin bears need to pressure the price below $42,000 on March 25 to avoid a $175 million loss. On the other hand, the bulls’ best-case scenario requires a push above $44,000 to increase their gains to $280 million.

Bitcoin bears had $150 million in leveraged short positions liquidated on March 22, so they should have less margin needed to push the price of Bitcoin down. That said, the bulls will no doubt try to defend $42,000 until the options expire on March 25.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.