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- Bitcoin’s options market suggests Monday’s price drop may be short-lived.
- However, the cryptocurrency remains vulnerable to a stock sell-off and the increased buildup of miners is a sign that the market lacks strength.
Bitcoin is undergoing the pull of gravity on Monday, along with losses in traditional markets.
As of press time, bitcoin is changing hands near $ 9,080, representing a 2.7% drop over the course of the day. Prices hit a three-week low of $ 8,910 during the first few hours of European trading, according to CoinDesk’s Bitcoin Price Index.
Meanwhile, futures related to the S&P 500 are down more than 2.5% and major Asian and European stock market indices are in the red, apparently on fears of a second wave of coronavirus infections in China.
The drop in bitcoin prices, however, could be short-lived, options market data suggests.
While bitcoin appears to track shares to the downside, the top cryptocurrency’s put-call volume ratio has risen to a three-month high. At 1.79, the ratio is currently at its highest since the market crash on March 12, according to data provided by crypto derivatives research firm Skew.
The put-call volume ratio is an indicator of the relative trading volumes of put options (bearish bets) and call options (bullish bets). To put it another way, the volume of trading in put options was significantly higher than that of calls.
“A put-call ratio greater than 1 is considered an indicator of a selloff while a put-call ratio less than 1 is a buying opportunity,” according to Investopedia.
However, when the ratio becomes too high (extreme bearishness), the market is considered ready for a higher reversal, and when the ratio is too low, the market is considered close to the maximum.
In the case of bitcoin, a reading above 1.7 could be considered too high. In the past, the relationship has only surpassed that level twice. Furthermore, on both occasions, prices have bottomed out on the same day or the next day.
The put-call volume ratio rose to a high of 1.89 on March 12, when the cryptocurrency dropped nearly 40%. The next day, prices hit a bottom at $ 3,867.
Likewise, the cryptocurrency bottomed near $ 6,500 in mid-December with the put-call ratio climbing to levels around 2.00.
As such, the latest reading of 1.79 could be seen as a warning of an impending bear trap, especially as the open put-call interest ratio, which measures the number of open put options versus open call options. recently hit a monthly low of 0.40.
“The divergence between the put-call volume and the decline in open put-call interest implies that many of the put positions have been closed for profit taking,” according to Chris Thomas, head of digital assets at Swissquote Bank.
Validating Thomas’s argument is the recent one-month put-call skew drop from 9.4% to 6.3%. The put-call skew measures the price of the put versus the call price. The decline, therefore, represents a resumption of demand for (bullish) call options.
Meanwhile, the three- and six-month skews are also hovering in negative territory, implying increased demand for expiring call options in September and December expiring contracts.
That said, options market positioning is known to change rapidly, and the cryptocurrency remains vulnerable to potential deeper sell-off in equity markets.
“The key thing to keep an eye on in the coming weeks is the sell-off of Covid-related shares. If the markets react very negatively to the rise in Covid cases, we may see more panic that bitcoin may even lower, “Thomas said.
Furthermore, bitcoin’s network stats are painting a bearish picture and the cryptocurrency’s “fair value” appears to be below $ 7,000. second Charlie Morris, Atlantic House fund manager and founder of ByteTree.
Miners, in particular, have been building up inventory over the past seven days, selling fewer coins than they generated.
Miners often hoard coins when they feel the market lacks the strength to absorb further sales, as discussed earlier this month.
Disclosure: The author does not own cryptocurrency at the time of writing.
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