Bitcoin faced a significant drop on August 16, closing below the $29,000 mark for the first time in 56 days. Analysts attributed this decline to concerns expressed in the Federal Reserve’s minutes about inflation and the potential need to raise interest rates. The market reacted to these uncertainties, causing a shift away from riskier assets like cryptocurrencies.
The upcoming expiration of $580 million worth of Bitcoin options on August 18 further favored the bears in the market. If things go as anticipated, they could potentially profit around $140 million, adding more downward pressure on Bitcoin. This expiration brings complexity to the cryptocurrency’s search for a bottom and presents a challenge for those trying to predict its future trajectory.
Federal Reserve Chair Jerome Powell’s emphasis on the 2% inflation target during the same period pushed the U.S. 10-year Treasury yield to its highest level since October 2007. This move prompted investors to move away from investments like cryptocurrencies and towards cash positions and companies that could better weather inflation scenarios. Interestingly, Bitcoin had already experienced a drop to $29,000, its lowest point in nine days, even before the release of the Fed minutes. The limited impact of these minutes on the market can be attributed to the rising 10-year yield, indicating doubt about the Federal Reserve’s ability to control inflation.
On August 17, the S&P 500 index futures only dropped by 0.6%, and WTI crude oil gained 1.7%, while gold traded down 0.3%. These numbers suggest that the Federal Reserve minutes did not have a significant impact on traditional markets.
The decline in Bitcoin’s price might also be influenced by concerns about China’s economy. The country reported lower-than-expected retail sales growth and fixed asset investments, which could potentially affect the demand for cryptocurrencies.
It is important to note that the exact causes of Bitcoin’s price drop remain uncertain. However, there is a possibility that the cryptocurrency could reverse its trend after the weekly options expiration on August 18.
In the days leading up to August 9, the price of Bitcoin briefly surpassed the $29,700 mark, sparking optimism among traders using options contracts. The open interest for options on August 18 reflected a 0.57 put-to-call ratio. This ratio represents the difference between the open interest of call (buy) options ($365 million) and put (sell) options ($205 million). However, due to the latest price drop below $29,000, the outcome will likely be lower than the total open interest of $570 million.
Several scenarios can be anticipated based on the current price action and the number of options contracts available for call and put instruments. For instance, if Bitcoin’s price trades at $28,400 at 8:00 am UTC on August 18, only $3 million worth of call options will be accounted for. This is because the right to purchase Bitcoin at $27,000 or $28,000 becomes invalid if BTC trades below those levels upon expiration.
Considering investors’ growing concerns about an upcoming economic slowdown due to inflation control measures taken by central banks, Bitcoin bears are expected to maintain their advantage. This trend extends beyond the upcoming Friday expiry and is likely to continue, especially since the chances of the BTC bulls’ primary short-term goal — the approval of a spot exchange-traded fund — are quite slim.
Consequently, those on the bullish side find themselves in a challenging position. The success of their call options relies on Bitcoin’s expiry price going above $28,500. However, the most likely scenario suggests a potential further correction in Bitcoin’s price, allowing bears to walk away with a favorable outcome of $140 million.
It is important to note that the information provided in this article should not be taken as legal or investment advice. The views expressed here are solely the author’s and do not necessarily reflect the views and opinions of Cointelegraph.