Bitcoin options open interest hits 2021 low as Frenzy Cools, or maybe it’s football

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The boom in bitcoin options trading that saw traders making ambitious bullish bets earlier this year has cooled in the wake of the recent price drop and subsequent consolidation.

“After the big June deadline, open interest has fallen to levels last seen in late 2020,” said Luuk Strijers, chief trading officer of Deribit, the world’s largest options exchange in terms of interest. open and trading volume. “Open interest and volume have declined in both dollars and bitcoin in recent weeks due to general bearish sentiment caused by China’s regulatory crackdown and other factors.”

Bitcoin options open interest on Deribit

Source: Deribit, Luuk Strijers

Open interest in bitcoin options listed on Deribit, or the number of open positions, fell to nearly 120,000 BTC on Monday, the lowest level since October. The count peaked at nearly 250,000 BTC at the end of March. On Deribit, an option contract represents one BTC.

Face value fell by more than half to $ 4 billion, also the lowest since late 2020. Other exchanges like OKEx, Chicago Mercantile Exchange (CME), LedgerX, Huobi, bit.com and Huobi recorded a Similar drop in open interest.

Open interest hit a record high of nearly $ 15 billion at the height of the bull market in mid-April and has declined in nominal and bitcoin terms ever since. The cryptocurrency peaked above $ 64,800 in mid-April and recently hit a five-month low below $ 30,000.

The data shows that although options are primarily hedging instruments, they were widely used for speculation during the bull run.

Bitcoin options open interest

Source: bias

“It’s more like a correction in open interest, just like there has been a correction in the price of bitcoin,” Martin Cheung, an options trader with Pulsar Trading Capital, told CoinDesk. “Price volatility has eased significantly, so we are now seeing less demand for options, which are hedging instruments.”

Bitcoin’s one-month implied volatility has fallen to nearly 90% from the high of 153% seen on May 23, according to data firm Skew.

Options are derivative contracts that give the buyer the right but not the obligation to buy or sell the underlying asset, in this case bitcoin, at a predetermined price on or before a specific date. A call option gives the right to buy and a put option gives the right to sell.

Traders often take up (calls) or down (puts) protection depending on their exposure to the spot or futures market when price turbulence is high. However, when volatility decreases, existing hedges are often squared and traders are less likely to take new hedges.

Hedge or speculation

Often times, especially during a strong bullish or bearish run, options are used for speculative purposes. For example, traders crammed into the out-of-the-money call option (OTM) strike at $ 80,000 in March and April in hopes that the rally would continue through the strong seasonal second quarter. . It sparked open interest.

However, the cryptocurrency crashed in May and was mostly limited to a range of $ 30,000 to $ 40,000 this month. The downward trend may have forced traders to re-evaluate their bullish expectations.

“When markets get tight, there is less demand for hedge,” Shilliang Tang, chief investment officer of LedgerPrime, a $ 130 million crypto hedge fund, said in a Telegram conversation. “In addition, there are fewer buy-outs as the funds adjust expectations in a context of consolidation and no V-shaped recovery.”

LedgerPrime bought deep OTM calls in the first quarter as the bullish momentum was quite strong and switched to buying spot carry trading and selling futures in the second quarter. As of last week, its quantitative fund was up 78% year-to-date, compared to a 22% gain for Bitcoin.

Also read: How a fund used the carry trade to beat Bitcoin

According to some observers, the slowdown in the options market is a sign that falling prices have crowded out a significant portion of retailer participation.

“Those new to crypto are likely to heal their wounds now, and with no strong market narrative except for the potential ether fork,” Chris Dick, a quantitative trader at B2C2, said in a Telegram conversation. There is little catalyst for retail to re-enter the market. ”

Football captures attention

According to Gary Pike, a trader at B2C2, retail traders with underwater holdings may be less inclined to take additional risks, especially with summer in full swing and the distraction from sports.

Football tournaments are continuing around the world and further distracting attention from the crypto retail business, ”Pike said, adding that he was confident the activity would pick up.

“The catalyst will come and volumes will come back to trading, if not from an event, then because of the traditional players picking up after the summer break,” Dick said.

While retail activity may have slowed, institutional stake in Deribit remains strong.

“We are seeing a growing interest in institutional integration and a pickup in bulk transaction volumes,” said Strijers of Deribit, adding that this shows institutional demand is still strong. A block transaction is one involving a large number of securities and is traded privately over-the-counter or off the open market for that security.

According to Tang of LedgerPrime, there is still a strong demand for options yield generation / harvest strategies, which seek to benefit from prolonged price consolidation.

Also Read: Bitcoin Set To Record Record Second Quarter Price Drop

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