The financial markets have a lot of trading instruments through which traders can explore the market and earn profits. These instruments range from those that allow the traders to own assets to those that allow traders to only trade the prices of assets without owning them. Bitcoin futures and options trading has become popular in recent years across crypto exchanges.
Although the price movement of Bitcoin offers more chances for entering and exiting trades due to its volatility, Bitcoin options are still widely regarded as an important instrument to bet on the price of Bitcoin within a certain period. The total investment in Bitcoin options has increased by a massive margin from when the instrument was first introduced.
As of today, there is $2.5 worth of Bitcoin options that are going to expire in a few hours. The expiry of these options with such a massive collective value may have some telling effects on the crypto market. The global market has been very volatile in recent months, bringing an almost stunning price action that has continued to defy the prediction of most analysts and traders.
How Will the Event Impact Crypto?
Will the expiry of these options affect the market positively or negatively? Will bitcoin’s price fall or rise once the options are filled? One thing is sure: the expiry will increase Bitcoin’s volatility beyond the current predictions.
In the financial market, traders buy or sell options as a hedge for their position on an asset. Traders do this when they perceive a rise in volatility, positively or negatively. The relationship between the open price of Bitcoin and the max pain price on options is a complex one that tends to influence each other.
For example, if there are more options targeting $80,000 for Bitcoin, the market sentiment will tend to be bullish because traders will begin to buy more in the hopes that the price will reach that mark or at least close to it. But in the event of a price crash or retracement, such as the one that happened today, the options targeting higher princess might expire on a loss.
Earlier today, Bitcoin value dropped by $2,000 to below $55,000. That liquidated many traders on futures contracts and will eventually cause a loss to options traders who set a higher pain price. The spot bears completely overpowered the futures and options bulls in the market today.
If most of the options close on a loss, the volatility of Bitcoin will be impacted. An increase in the volatility of Bitcoin will see more bears enter the market as they try to lock profits from the downtrend. However, at some point, the bulls will enter and try to wrestle the price back to a bullish trend.
On the surface, Bitcoin’s drop in price today might have liquidated futures positions and caused options to fail, but it has also afforded holders to buy more of the token as they prepare for the next bull run.