$14 Billion Options: Why Bitcoin Stabilized When Markets Turmoiled

This is the largest liquidation event recorded this year on the Deribit exchange, the derivatives arena of the crypto market, and it deleted almost 40% of all open positions in the market at once. The leading digital currency fell on Friday by about 5% to a level of $65,500 – the lowest since March 2, and well below the record recorded last October, about $126,000.

Where has the volatility gone?

What made the event particularly explosive is its proximity to a particularly tense military deadline: the expiration of the time period that Donald Trump gave Iran to return to the negotiating table (which has meanwhile been extended by another 10 days). The proximity of the events created a fascinating phenomenon: while tensions in the Middle East should have boosted volatility, due to the proximity of the expiration date, it was absent. The reason is that the market makers, those institutional entities that sell the options to traders, worked to “magnetize” the price towards the “Max pain” point, which was $75,000.

The Max Pain point is the target price at which, at the moment of expiration, the maximum number of options (both Call and Put) will be worthless. At this price, most traders (buyers) lose their money, and those who profit are those who sold them the options, the market makers. As the expiration date approached, market makers had to balance their positions. If the price rises above $75,000 the market makers need to sell Bitcoin to protect themselves against losses in Call options – a sale that pushes the price back down. The same goes for the opposite: if the price drops below $75,000, they have to buy bitcoin to balance put options – a purchase that pushes the price back up.

Until March 16 (when Bitcoin was trading at about $75,000), the artificial restraint was pretty much working. But from then until March 27 (expiration day), fear prevailed over mathematics: Institutional and large investors who anxiously watched the skyrocketing oil prices and the bond yields approaching 4.5%, sold Bitcoin in order to transfer their money to the new-old safe haven asset – the dollar. These were accompanied by an outflow of funds from the ETFs which created additional selling pressure, and all of this created the so-called “negative gamma effect”. – A kind of snowball that explains how we got to about 65 thousand dollars per coin.

The effect occurs when Bitcoin starts to fall due to the news of the war, and the market makers are forced to protect themselves from losses in the customers’ put options. They must sell more Bitcoin as the price falls, which increases the downward pressure even more. Simply put: their technical mechanism forced them to join the sales, which caused a “snowball” that lowered the price.

The coin was released from the cage

Now that Bitcoin has been freed from the financial “cage” it has been in for the past few weeks, and is now exposed to the stormy winds of the Middle East without a financial body that must act against the direction to curb the fluctuations, every tweet from Trump or a spike in the price of oil will translate into sharp fluctuations.

Alex Kopcikevich, the chief analyst of the trading giant FxPro, claims that the “nervousness” on Wall Street makes digital currencies especially vulnerable in the event of a mass selloff. According to his analysis, despite Bitcoin’s status as the most dominant asset, it still behaves as a distinct risk asset.

When investors are spooked by geopolitical volatility in the Middle East, they tend to cash in on liquid assets like Bitcoin and Ethereum to hedge losses elsewhere. This data takes on new validity when you look at the fact that Bitcoin and Ethereum are now trading at a low of 50% and 60% respectively from their all-time highs.

And now, where is the bitcoin?

The big question that remains open is whether Bitcoin will be able to restore its status as “digital gold” in times of crisis. Although capital inflows were recorded at the beginning of the conflict, the aforementioned currency is currently trading far from its peak. Currently, the pressure in the bond market and the rising inflation following the war are pushing investors back to the US dollar, leaving Bitcoin in a state of watchful waiting.

In the Wall Street Journal, on the other hand, they write that it is likely that Bitcoin will remain at the current level – but not because of internal factors in the crypto market. The demand to buy is definitely there: whales continue to collect goods, and institutional money is still flowing in as well. “However, all this was not enough to push the price of bitcoin upwards, as long as oil prices remain above $100 and the war with Iran continues to escalate. The fact that buyers are entering the market and yet the price continues to fall, indicates that the main cause of the pressure is not the crypto itself – but the war and energy prices, which affect all markets.”