The cryptocurrency market has been experiencing bearish sentiments over the last few months as the prices of bitcoin and other high market cap altcoins continue to fall below the initial support levels. The bearish market sentiments are also reflective in the options market, a derivatives market that helps investors hedge their funds against risk. And given the high volatility of the cryptocurrency market, we can deduce, from the put-call skew, that the market’s bearishness will only continue.
WHAT IS BITCOIN PUT AND CALL OPTIONS?
Before unpacking what the put-call spew reveals, we should understand what bitcoin put and call options are.
The options market is a derivative market, in the same way, the futures market is. The options market works like this:
When a buyer perceives that the price of an investment, in this case, bitcoin, will rise, the buyer places a call option. With this trade, the buyer buys the bitcoin at the later date. The call option is the direct opposite. If the buyer feels the price will fall, then the buyer can place a call option for a later date, at a reduced price.
That is the simple explanation of the options market.
So, how does the bitcoin options market tell us what the market sentiment is?
So, if many people predict that the market will be bullish, they place more call options. If the market goes according to their bullish prediction, they make money. If investors go otherwise, predicting a fall in prices, it means the sentiment is bearish.
Does that make any sense?
Okay, now that you understand that, let’s talk about the put-call spew.
WHAT IS PUT-CALL SPEW?
The put-call spew measures how many investors are placing put options as compared to those placing call options. The spew reflects where the sentiments of the options market are tilted towards.
A positive percentage put-call spew indicates a bearish sentiment. And in December, the put-call spew recorded positive 3%, a six-week high, the data from cryptocurrency options derivative research firm Skew.
The positive put-call spew shows just how the options market perceives bitcoin’s price. It is a bearish perception, one is tempted to believe, is bad.
But the put-call spew percentage does not always reflect the proper sentiment of the market.
Hold on, let me explain what I mean.
So, traders and investors may be making some of these put options as wedges against the long options they’ve taken on the futures market. So, they don’t lose on both ends, taking call options is the wise investment decision to make.
But whether traders and investors were taking more call options as wedges against their long options or not, you won’t blame these traders. The falling price of bitcoin over the last few months, falling from all-time highs of $67,000 to as low as $47,000 makes it hard to bet on a bullish market now in the near future.
And there is the reduction of bitcoin’s dominance, meaning many investors, while they still see bitcoin as a hedge against inflation, are wary about holding so many bitcoins in their cold wallets.
THE END OF THE U.S STIMULUS PROGRAM CAUSED THE BEARISH MARKET SENTIMENT
The cryptocurrency market, as much as it thrives on its decentralization, is not separated from the happenings in the traditional markets and economic situations in the world. The United States two-year stimulus program is being brought to an abrupt end, and the effect is a stronger United States dollar.
Okay, let me break this down for you.
The United States of America stimulus program is a program that allows the United States of America to print loads of US dollars to help struggling financial institutions and businesses stay afloat. It is the US Federal Reserve pumping more money into the economy to stimulate economic growth.
While this method of economic revival is often frowned on because of the long-term effects on the economy, it has proven a safe and fast way to resurrect a dying economy. The program also affects the strength of the US dollar where inflation increases, and the dollar value decreases.
However, the plan is to stop the stimulus program, and thus causing the US dollar strength to increase.
If the strength of the dollar increases, the price of bitcoin will be kept under check.
SO, WHAT DOES THE PUT-CALL DATA SHOWS?
The put-call data from Skew reveals that at the end of December 2021, over 51,900 bitcoin options were expected to expire. And these call options were worth over $3billion.
Now, it is pertinent to state that put-call options are sometimes traded on a regular trading platform such as Redot.com. But not all trading platforms support calls and put options on their platform. Deribit is the largest options trading platform in the world, and of the $3billion bitcoin options that expired in December, Deribit accounted for $2.5 billion of those options.
WHAT IS THE MARKET SAYING NOW?
The cryptocurrency market is experiencing some of the worst bearish seasons it has experienced in years. The price of bitcoin is on a free fall, defying the predicted bull run in January. And other top altcoins are also towing the same path that bitcoin is taking, as prices of Ethereum, Solana and BNB have fallen drastically over the last few weeks.
The prediction that bitcoin will reach an all-time high of $100,000 by the end of March 2022 from crypto analysts doesn’t look likely. The market is going through a bearish period that is making cryptocurrency naysayers wonder if digital currencies are losing ground in staking their claim as a good replacement – or if not a replacement, a good alternative – to fiat currency.
As at the time of writing this article, the prices of bitcoin were around $43,365, and Ethereum was at $3,450.
The market is still bleeding, and bleeding fast. While many had hoped that the market would experience some green, the reality makes it hard to see a bullish market that can be sustained for weeks or even months.
The bearish market notwithstanding, analysts are still optimistic that the major cryptocurrencies will bounce back from the bearish slide.
Comments are closed.