Bitcoin traders are bracing for potentially sharper price swings as US$11 billion (S$14.09 billion) of options expire this week, just days before US midterm elections that could add further uncertainty to crypto markets.
The contracts expiring Oct 30 account for roughly a third of all outstanding Bitcoin options on the trading platform Deribit. Options give holders the right to buy or sell Bitcoin at a set price.
The largest cryptocurrency has been under pressure after falling below US$80,000 on Oct 26, a level it has hovered around this week. It fell as much as 2% on Oct 29 and was trading around US$79,900 as of 8.30am in London.
Many of the expiring contracts are bets on prices that look unreachable in the near term.
Options to buy Bitcoin outnumber those to sell it, with large concentrations at the US$90,000, US$95,000 and US$100,000 levels.
Those higher-priced contracts are now likely to expire worthless.
The more uncertain risk is for holders of contracts tied to prices closer to where Bitcoin is trading today. As the cryptocurrency moves, dealers need to buy or sell to offset their exposure.
About 70% of the expiring options’ gamma – a measure of how sensitive dealers’ hedging needs are to Bitcoin price moves – is concentrated between US$75,000 and US$82,000, according to Adam Haeems, head of asset management at Tesseract Group.
Below the US$80,000 strike price, options to sell Bitcoin outnumber those to buy it by more than two to one.
Public data does not reveal which side of those trades dealers hold, Haeems said.
If dealers are short, their hedging could accelerate a fall through the range of US$75,000 to US$78,000, he said, while long traders could help cushion the decline.
Greater volatility could come after Oct 30. Investors who sell options against their Bitcoin holdings typically sell a new batch as the old ones expire.
But sellers may now be waiting until after the Nov 3 midterm elections in the United States, generating sharper price moves, according to Caroline Mauron, co-founder of Orbit Markets.
“This could lead to higher volatility through the results, as the usual gamma supply dries up,” Mauron said. That would mean fewer options sellers around to dampen price moves.
Control of Congress could shape how much US President Donald Trump can advance his pro-crypto agenda, potentially giving Bitcoin another catalyst in either direction.
Trump has achieved parts of his agenda with a law governing stablecoins and looser regulations to allow for tokenised stocks and other crypto products in the country.
However, major regulatory legislation in the form of the Clarity Act failed to advance in the Senate in September, while Republicans held a slim majority.
If Democrats take control of both the House of Representatives and the Senate, it could revive concerns over tougher industry oversight in the two years remaining in Trump’s second term.
The median year-end forecast for Bitcoin if Republicans keep control of both chambers was US$90,800, compared with US$76,450 if Democrats take control, according to a Bloomberg News Market Pulse survey.
For a split Congress, it was US$84,100.
Paul Howard, senior director at Wincent, said the elections could spur investors to buy more options to sell around the current Bitcoin price level, protecting them against further losses.
“With volatility having remained at historically subdued levels over the past year, my expectation is that we will see a meaningful pickup in November,” Howard said, adding that he expects more positioning that benefits from price swings. BLOOMBERG
