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Bitcoin Options Shows Traders Are Already Hedging After Record Rally to $100,000
(Bloomberg) -- Bitcoin pulled back a record high with some traders already seeking to hedge against a deeper retreat after the original cryptocurrency surged to more than $100,000 for the first time.
There has been an uptick in demand for put options, or contract that gives the buyer the right to sell an asset at a predetermined price within a set tie period. Puts with strike prices of $95,000 and $100,000 have seen the largest open interest positions over the last 24 hours, according to Amberdata, which tracks digital-asset market data. Demand for puts in the $75,000 and $70,000 range has also increased.
“When we break it down by expiration, we can see that put open interest is mostly concentrated in late December and late January, with some late February as well, which would be logical as to hedge this big upside move to any correction or surprises,” said Luke Nolan, research associate at crypto asset manager CoinShares.
While puts are clustered around expiries early next year, the total open interest for those contracts is still low compared to the open interest on calls expiring in the same period, according to Deribit.
Bitcoin finally broke through the $100,000 price level late Wednesday amid optimism that President-elect Donald Trump’s pick of a digital-asset proponent to be the next head of the US securities regulator will push crypto further into the mainstream. Market bellwether Bitcoin has surged around 50% since the election last month.
The digital currency was little changed at around $99,100 as of 5:03 p.m. in New York. It has climbed to as high as $103,801 earlier.
Crypto traders are continuing to pile into leveraged bullish bets following multiple failed attempts in recent weeks to reach $100,000.
The funding rate, a key indicator to measure leverage in the crypto market, is approaching an all-time-high. That figure shows traders are willing to pay high premiums to lever up their bullish bets through perpetual futures contracts, which is one of the most common ways for investors to double down a directional move in Bitcoin prices.
“Bitcoin’s recent surge past the $100K mark has triggered a significant uptick in funding rates, approaching the intra-year high from March and nearing the all-time high set in Q4 2021, ” said Brian Strugats head of trading at crypto prime broker FalconX. “The pattern mirrors previous bull markets, where such spikes in funding rates accompany strong price momentum, reflecting the high demand for leveraged positions.”
Bullish sentiment has been echoed across other corners of the crypto derivatives market. Termed futures contracts on the CME exchange, one of the most popular options for the US-based institutions to bet on digital assets, has seen chunky premiums, while the options markets on offshore exchange Deribit and the newly launched options based on BlackRock’s spot Bitcoin exchange-traded fund point to bullish outlook for the crypto market.
Short-dated call options at strike prices in the range of $100,000 and $110,000 have seen the biggest jump over the last 24 hours, according to data compiled by Amberdata. Large blocks overnight included naked calls expiring on Dec. 7 at the strike price of $100,000 with the call spreads between $110,000 and $160,000 expiring on Jan. 25 next year traded for over $2 million in outlay, crypto market maker Wintermute OTC trader Jake Ostrovskis said.
“The majority of open interest in the IBIT options market is emphatically towards out-of-the-money calls. Furthermore, the implied volatility for 10 delta calls on IBIT is much higher for contracts about to expire, compared to contracts with longer expirations,” said Gabriel Selby, head of Research at CF Benchmarks.
The elevated funding rate could set the stage for a pullback as evidenced in previous bull runs.
“Funding rates this high are typically temporary - we haven’t seen such a surge in the funding rate since early March of this year, where funding reached a high of 145% annualized on Deribit, amidst the ETF-flow driven move higher in BTC,” said Bohan Jiang, head of OTC options trading at Abra.
The funding rate is a good way to judge to what extent the market is overheating but can be very dangerous as they can stay high for longer than expected, said Nathanaël Cohen, co-founder at digital-asset hedge fund INDIGO Fund.