Market makers of crypto options are influencing bitcoin price

cryptocurrency

As renewed fears of early Fed interest rate hikes, the latest gloomy mood in financial markets, and Tesla’s decision to halt bitcoin payments all pushed bitcoin prices lower on Wednesday, it reached multi-month lows near $46,000.

In addition, Fredrick Collins, an experienced options trader and researcher at Glassnode, says the downward trend was likely exacerbated because options market makers sold the cryptocurrency to offset; according to Collins, market makers were heavily short puts in the range of $52,000 to $50,000. “That likely exacerbated the bearish move,” Collins said in a tweet chat with CoinDesk. “Market makers likely sold nearly 2,900 bitcoin to offset the short gamma exposure.” heir bullish exposure.

According to Collins, market makers were heavily short puts in the range of $52,000 to $50,000. “That likely exacerbated the bearish move,” Collins said in a tweet chat with CoinDesk. “Market makers likely sold nearly 2,900 bitcoin to offset the short gamma exposure.”

The episode demonstrates how the increasing trade in cryptocurrency options in recent months has led to increased volatility in bitcoin’s spot price, with monthly expiries setting off a chain reaction that intensifies risk. According to Skew data, the open interest in the options market has risen from $50 million to over $10 billion in the past year.

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It is the responsibility of the market maker to ensure a healthy level of liquidity on an exchange. Having For example, if the trader needed to buy a Bitcoin call at $80,000 right now, but no matching sell order existed, the market maker would step in and sell the $80,000 call, facilitating the transaction. Call options allow the holder to buy the underlying asset at a predetermined price or before a specified date, called expiry but do not obligate him or her to do so. A put option entitles the buyer to sell the stock. A deep order book ensures that they can buy or sell call/put options at any time.

As a result, market makers buy and sell the underlying asset as price swings and maintain a market-neutral portfolio by trading against investors. Options traders call this process “gamma hedging.”

Gamma refers to a change in delta – the price of the option’s sensitivity to changes in the underlying asset. The gamma parameter indicates how much the cost of an option changes compared to the rate at which the spot price fluctuates.

An option that is long (positive) gamma is considered profitable for the buyer due to the faster transfer of value. Thus, the buyer makes money, and the seller loses money.

bitcoin

Collins reported on Wednesday that market makers were short gamma (sellers of put options) at between $52,000 and $50,000. After bitcoin started declining, harmful gamma exposure became a problem: These strike prices pushed up the price of sales pits, indicating losses for market makers. As a result, market makers sold bitcoins in the spot / futures market.

So, As a result of bitcoin’s price decline, dealer inventory fell by 2,900 BTC, according to Collins data. Stocks standing in short positions on the spot market and in futures markets form the basis for the inventory estimate. On significant exchanges, one BTC contract applies to one coin. The contract size at the Chicago Mercantile Exchange is five.)

Founder and CEO of Genesis Volatility, Greg Magadini, agreed with Collins’ theory, explaining in a Telegram chat that many traders were placing long put positions and bearish bets between $50,000 and $48,000.

One argument against it is the fact that it is too tiny a trade at the current market price of around $50,000 to have any significant impact on the market capitalization of the cryptocurrency with a market capitalization of $1 trillion.

Despite this, the fact that trade and analysts assess cryptocurrency options market makers’ hedging activities points to the derivatives segment’s increasing relevance in the bitcoin market.

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