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Options market data suggests Bitcoin's potential surge above $36K

03 Nov, 2023

Bitcoin (BTC) celebrated its fifteenth birthday on Tuesday, and anyone who made friends with the world's first cryptocurrency back in its infancy has plenty to be happy about. The digital asset has increased in value by almost 3,500,000,000% since it was first listed for sale on an exchange.

Although 2023 has so far been characterised by a 'crypto winter' of low volatility and sluggish price action, recent market activity suggests a turning point for Bitcoin and other cryptocurrencies. Bitcoin has posted a classic 'Uptober', enjoying an impressive 29% rally over the past four weeks. That makes October the second-highest-performing month of 2023, just behind January's 39% gains. This is due to buzz around the likely approval of spot Bitcoin ETFs in the near future, as well as anticipation of the next scheduled halving of rewards for Bitcoin mining in April 2024.

At the time of writing, Bitcoin is trading at around $35,400. But what comes next for the top cryptocurrency? According to the prevailing sentiment among analysts, BTC is poised to break $36,000, and the signs are all there in the options market.

Looking at the options

Analysts cited recent data from the options trading market indicating that Bitcoin may experience a significant price surge beyond the $36,000 threshold. This is due to activity among market makers dealing in Bitcoin options, who appear to have taken a bullish position.

In the world of cryptocurrency, options are derivative contracts that grant the buyer the right — but not the obligation — to purchase or sell the underlying asset at a predetermined price, called the strike price, on a future date. A call option represents a bullish bet, providing the right to buy, while a put option grants the right to sell.

Bitcoin's Uptober rally coincided with a growing demand for call options with higher strike prices in the options market. According to several prominent analysts, notably crypto fund management firm Galaxy Digital, this surge has resulted in options market makers accumulating substantial net short gamma exposure above the $36,000 level. Options gamma represents the rate at which delta, a measure of options price sensitivity to changes in Bitcoin's value, will alter with a $1 shift in Bitcoin's price.

When market makers find themselves in a net short gamma position, they tend to purchase the actual asset in the spot market as its value increases. This is done as part of a strategy to maintain an overall neutral delta, part of their mission as market makers. This type of hedging activity can often amplify price rallies, a phenomenon known as a "gamma squeeze", and it likely played a role in Bitcoin's recent rapid ascent from $30,000 to $35,000.

Alex Thorn, head of firmwide research at Galaxy Digital, explained that if the BTC/USD price moves higher towards the $35,750 to $36,000 range, options dealers will need to buy approximately $20 million worth of Bitcoin in the spot market for every 1% increase. This buying pressure could potentially fuel further price surges.

Market makers, or dealers, are entities responsible for providing liquidity in order books and typically stand on the opposite side of investors' trades. They generate revenue through the bid-ask spread and aim to maintain a neutral portfolio with respect to market direction.

The current positioning of market makers and its potential impact on the spot price differs from the earlier part of the year when market makers were net long gamma. During that period, they bought low and sold high in the spot and futures markets to keep their portfolios balanced, contributing to the period of low volatility in the market that characterised the first part of 2023.

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