Bitcoin Dropping Below $40K Does Not Worry Institutions, Options Data Shows

Institutions do not seem to be worried about Bitcoin’s significant drop from its new ATH of $49,000. After a nearly $3,000 drop, institutions are confident in the long-term prospects of the coin.

After failing to break a psychological hurdle of $50,000 over the weekend, Bitcoin retrenched after nearly $2 billion was liquidated from the crypto market overnight. However, with recovery underway, there are fewer signs of bigger losses in the coming days. At 15:26 GMT on Monday, the benchmark cryptocurrency sold at $48,468 with a meager loss of 0.71% in the last 24 hours. In the options market, the signs of losses are also low.

Deribit Insights explained the reason for the price drop and the effect on the options market flows in a Twitter thread earlier today:

There is still an absence of any institutional long-term hedging. In fact, funds continue to take advantage of selling June-December expiry put options at strikes below $40,000

As of writing this, large investors are selling long-term puts below $40,000. This suggests that institutions are not anticipating a big drop or prolonged drop below $40,000.

Deribit Insights suggests that this may mean that the absence of implied volatility spike on the drop from $49,000 to $46,000 or a quick bounce back to $48,000 shows that institutions believe that Bitcoin is consolidating.

Shaun Fernando, head of risk and product at Deribit said:

The strategy of selling the downside puts is two-fold: to get premium (theta) which is higher with higher volatilities, and also because the traders don’t think a crash will happen before that expiry

The six-month put-call skew, which measures the cost of puts relative to calls, remains entrenched in the negative territory, supporting Deribit’s assessment.

skew 25 day chart

If institutions had decided to buy long-term puts to position for a deeper price slide, the six-month put-call skew would have turned positive. In addition, put buying that occurred in the June to December expiry series would have pushed long-term implied volatility (IV). IV is a measure of investors’ expectation of BTC price turbulence.

IV chart of implied volatility among investors

Investors turbulence expectations on the six-month IV dropped from 104% to 99.6% in the last 24 hours. This is an encouraging outlook for the king cryptocurrency.

Limited profit is expected from selling options, whether put or call. It is advisable to leave big losses to big institutions with large capital supply. An asset can drop to zero or rise to infinity. Bitcoin is not exempt.

If you have any questions and comments on Bitcoin today, use the form below to reply.

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Published under: Technical Analysis

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