The Zhitong Finance App learned that with the $11 billion option contract expiring this week, Bitcoin traders are preparing to face potentially more drastic price fluctuations. Meanwhile, the options expire only a few days away from the US midterm elections, which could further increase uncertainty in the cryptocurrency market.
The contract due on October 30 accounts for about one-third of all outstanding Bitcoin options on the trading platform Deribit (options give the holder the right to buy or sell Bitcoin at a predetermined price). Bitcoin has continued to be under pressure recently, falling below $80,000 on Monday, and has been hovering around this level this week since then.
Many expiring contracts are betting prices that seem out of reach in the short term. There are more bullish Bitcoin options than bearish options, and a large number of contracts are concentrated at the equivalent of $90,000, $95,000, and $100,000. Today, these higher execution price contracts are likely to expire and be voided.
For contracts linked to a price closer to Bitcoin's current transaction price, the risk is even more uncertain. As cryptocurrency prices fluctuate, market makers need to buy or sell Bitcoin to hedge their risk exposure.
Adam Haeems, head of asset management at Tesseract Group, said that of the expiring options, about 70% of Gamma — an indicator that measures how sensitive market makers' hedging demand is to Bitcoin price changes — is concentrated in the $75,000 to $82,000 range. Below the $80,000 execution price, the number of bearish Bitcoin options surpassed the call options, with a ratio of more than 2 to 1.
Adam Haeems said that public data does not show which side of the market maker is holding positions in these transactions. He pointed out that if market makers hold short positions, then their hedging operations may accelerate Bitcoin's fall below the $75,000-$78,000 range; while if traders hold long positions, it may help cushion the decline.
Bitcoin's volatility is likely to rise further after Friday. Investors who hold Bitcoin and hedge by selling options usually re-sell a new batch of options after the old options expire. However, Caroline Mauron, co-founder of Orbit Markets, said that now these options sellers may wait until the US midterm elections end on November 3 before taking action, leading to more drastic price fluctuations.
“This could lead to increased volatility during the announcement of election results as the usual supply of Gamma is drying up,” said Caroline Mauron. This means there will be fewer options sellers in the market that can contain price fluctuations.
The change in US congressional control will affect US President Trump's ability to advance his pro-cryptocurrency policy agenda and could provide another catalyst that could drive Bitcoin up or down. Trump has achieved part of his policy agenda by passing a law regulating stablecoins and measures such as easing regulations to allow tokenized stocks and other cryptocurrency products to be issued in the US. However, an important regulatory legislation called the CLARITY Act failed to be advanced by the Senate in September, when the Republican Party had only a weak majority. If the Democratic Party controls both the House of Representatives and the Senate, market fears that the cryptocurrency industry will face stricter regulation may rekindle during the remaining two years of Trump's second term.
According to Market Pulse's survey, the median price forecast for Bitcoin at the end of the year is $90,800 if the Republican Party continues to control both houses of Congress; $7645 million if the Democratic Party controls both houses of Congress. If the National Assembly were divided between the two parties, the median forecast would be $84,100.
Paul Howard, senior director of Wincent, said that the midterm elections may prompt investors to buy more put options with execution prices near the current Bitcoin price to protect themselves from further declines. Paul Howard said, “Given the historically low level of volatility over the past year, I expect a clear recovery in volatility in November.” He added that he expects the market to have more position layouts that can benefit from price fluctuations.