Why Bitcoin Must Defend $ 30,000

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The simplistic days of trading bitcoin by scanning technical charts and the spot market order book are over.

The bitcoin market has matured since the March 2020 crash, and participants can no longer condone macroeconomic developments and activity in the futures and options market.

This was especially the case on Thursday, when the risky mood on Wall Street put downward pressure on bitcoin and pushed the cryptocurrency towards a support of $ 30,000, which, if breached, could invite more selling pressure from options traders, causing a rapid drop.

With bitcoin stuck in a wide range of $ 30,000 to $ 40,000 since mid-May, many options traders have sold puts at $ 30,000 and calls at $ 40,000. These trades were recorded on Deribit and other crypto derivative exchanges in the hope that consolidation would continue, leading to lower implied volatility and the value of both calls and puts.

A put option gives the buyer the right but not the obligation to sell the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy. Put simply, selling a put option is tantamount to offering insurance to the buyer of the sale against a drop in the price below a particular level in this case $ 30,000.

“After the mid-May sell-off volatility peaked, but since then spot prices have been trading within a base range. These types of consolidation periods are perfect environments for low volatility trading, ”said Greg Magadini, CEO and co-founder of Genesis Volatility. “The main idea is that prices meander between support and resistance, and traders sell options expecting these levels to hold.”

But bitcoin is getting closer to the lower end of the $ 30,000 range. If that level exceeds that level, traders who have written puts at that level can resort to hedging downside risk by short selling bitcoin futures or selling bitcoin in the spot market. This, in turn, could add to the downward pressures around the cryptocurrency, leading to a deeper price drop.

“If the support or resistance levels break, traders will need to hedge quickly as prices will move quickly to new levels,” Magadini said. “The hedging activity of various traders on the same side of the volatility trade also creates a self-reinforcing event.”

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