The last decade has been pretty eventful for the crypto market as innovations popped up following Bitcoin’s debut in 2009. What started as a revolution against the traditional financial ecosystem has grown into a $1.6 trillion market as of press time. This trajectory is expected to continue, with analysts predicting Bitcoin could go as high as $100K by December 2021.
Some of these predictions are based on Bitcoin options contracts that expire at the end of 2021. While not everyone agrees that Bitcoin options expiry affect market prices, historical price action shows that Bitcoin’s price has been volatile around option expiry dates. Most of the options contracts in crypto are settled on the last Friday of the month – at this time, the market is volatile, at least for the previous few months.
This price action has raised heated arguments, with some analysts arguing that the nature of Bitcoin’s options market exposes crypto to price manipulation.
But how true could this be? Let’s find out by looking at the previous price action in detail and a new concept, ‘max-pain’, which plays a fundamental role in the Bitcoin options market.
A Loophole for Price Manipulation?
Still largely unregulated, the crypto market has often been criticized for ‘possible’ price manipulation by whales – big-time investors with enough capital to move the market. According to on-chain analysis, whales have been moving massive amounts of capital around Bitcoin option expiry dates. Could this count as price manipulation? Well, not everyone agrees, although recent data points towards such a possibility.
Looking at this year’s Bitcoin option expiries, it seems that option sellers often push the price towards the ‘max pain point to make the most of their positions. The max-pain point is the price at which most Bitcoin options are likely to expire worthless, giving option sellers an upper hand. As for buyers, they remain at the mercy of institutions and high net worth individuals who seem to have mastered crypto ‘poker’.
Playing Poker With Bitcoin Prices
Looking back in March, Bitcoin’s price was surging as euphoria kicked with the leading digital asset hitting $60K. However, BTC plunged to the $50K range during the last week of March, pushing the price close to the max-pain price of $44K.
A similar pattern has been replicated in subsequent months, with April’s options being front-run by a bullish week. At the time, Bitcoin’s price was trading at $48K, while the max-pain price for April’s $4.2 billion expiries stood at $54K. The option sellers created bullish pressure this time, eventually pushing Bitcoin’s price to $54K before the expiry date.
As for May, the crypto market had turned bearish following the bloodbath that wiped out the total crypto market cap by over 50%. Nonetheless, option sellers still showed determination to pump Bitcoin’s price from $38K closer to the max-pain price of $50K. June was relatively slow for the crypto market, with open Bitcoin options contracts dropping by almost half.
In July, the latest Bitcoin option settlement has again sparked the trend as prices plunged following the settlement of $1.6 billion worth of Bitcoin options contracts. According to Coindesk, prices dropped towards July’s max-pain price of $35K as soon as the largest crypto derivatives exchange, Deribit, settled its option contracts,
“The cryptocurrency slipped from $39,800 to $38,500 after 08:00 UTC (4 a.m. ET), the designated settlement time on Deribit.”
With August expiries slated three weeks from now, the last week will likely be equally volatile depending on the max-pain price. Should it be higher than the prevailing spot prices, option sellers might push prices up and vice versa. As of press time, the total BTC options open interest is slightly above $6 billion, with Deribit taking the lion’s share, according to Skew, a crypto analytics data provider.
Building Continues…
Despite all this hullabaloo, crypto market stakeholders are still coming up with new strategies to hedge exposure. Some of them are based on trading delta and gamma neutral strategies. On the other hand, advanced players are pivoting to Decentralized Finance (DeFi), which now features protocols that offer decentralized derivatives.
One such DeFi protocol is Premia Finance, a permissionless options protocol that enables crypto users to mint customizable call and put options. Founded in 2020, this decentralized financial instruments protocol is designed to change the landscape for Bitcoin option traders. With Premia, option traders can write, exercise, and trade options for native Ethereum and Binance Smart Chain (BSC) tokens.
Even better, Premia’s decentralized ecosystem exposes users to other DeFi opportunities, such as staking the platform’s native token for network rewards. The platform has also hit significant milestones in the crypto derivatives market, recording over 50K in DAI transactions and 2M DAI in open interest within its first month of launching.
Closing Thoughts
The Bitcoin options market is just getting started – it is likely to grow bigger as more capital flows from institutional investors. While the effect on the spot prices remains a topic of contention, thought leaders, including Deribit’s CCO Luuk Strijers, have previously commented on the possible impact of Bitcoin option expiries on market prices.
Strijers told Coindesk in March that prices would likely tumble given a max-pain price of $44K while Bitcoin was trading close to $60K,
“Max pain for the March 26 expiry is currently $44,000 on Deribit … That does not mean the market will move to $44,000 by the end of this week, but it does imply that after Friday this potential downward pressure no longer exists.”
In hindsight, this came to pass, although the prices only dropped to the $50K level.
Going by these trends, predictions on crypto prices might have to integrate the max-pain point factor to increase the accuracy. However, it will take a while before analysts can conclude on the magnitude of which option expiries affect Bitcoin’s price.