The year 2024 got off to a pretty good start for the crypto universe as well as for bitcoin. While some are wondering if we are going to have a sustained bullrun, options traders are betting on an ATH. This kind of situation is not surprising when we are in bullish momentum and flows are accumulating. We will therefore look at the arguments which push us to bet towards ATHs for bitcoin.
The options market
Options have become very popular since the Covid crisis. Options allow you to use a little leverage and have a risk limited to the premium price (option price) when making a purchase. There are call options and put options. Purchasing an option gives the right but not the obligation to buy or sell the underlying asset at a strike price fixed in advance and on a specific date. We can both buy a call or put option where you can sell a call or put option. In option buying, the risk is limited to the cost of the premium, and in option selling, the risk can be unlimited without maneuvering on protection strategies. Therefore, there are 4 possibilities. As each contract has leverage and limited risk when purchasing, this allows investors and/or speculators to have more exposure at a lower cost. Options can be used for different reasons such as taking a directional position, speculating, hedging or carrying out non-directional strategies.
Bitcoin Options Trend Aligns Towards an ATH
In this bullish momentum, we have several options speculators who are placing bets on bitcoin’s latest highs. We have exceeded the $50,000 mark for a time which remains a psychological level. Moreover, we can see that the most important exercise price according to the option chain remained the $50,000 level for the month of February.
As soon as this key level is broken, it encourages others to enter and bet on higher levels including ATHs. Generally, higher options activity is often a sign of speculative interest in the asset. We can see that traders will seek higher prices for expirations up to December 2024. We can see in particular a concentration around 65,000, 70,000 and even $100,000.
There may be two reasons why speculators choose a farther strike price:
1/ The further the exercise price is from the current price, the cheaper the cost of the option will be. These are called ‘out of the money’ options. The price of bitcoin being high, speculators will favor buying options that will cost less.
2/ An increase in options activity suggests a bullish outlook as they anticipate a rise in price.
On the other hand, in terms of volume, we can see a concentration of volume for options that expire in March 2024. It is on the $60,000 level.
Options, a technical and complex mechanism
On a more technical level at the options level, there is also a mechanism behind options dynamics. To buy options, there must be market makers who sell options (liquidity provider). To avoid being fully exposed to risk when market makers sell an option, they will have to protect themselves by buying the underlying asset in return for selling a call option (a call). Therefore, it can also push the underlying higher if call option demand is high since market makers will buy the underlying to keep a neutral exposure.
The technical aspects that support the rise of Bitcoin
Generally speaking, the bitcoin trend remains bullish and intact. The price of bitcoin is still above the 10mm mark, which remains technically bullish. When bitcoin crosses above moving average 10 (monthly portrait), this generally heralds a new bullish cycle as can be seen in the chart below. On the other hand, if we add a trend indicator like the MACD, the momentum remains positive. This means that the trend is bullish.
When bitcoin becomes quite directional, we cannot rely on overbought indicators. An overbought zone can persist for several months. For example, as soon as bitcoin reaches its overbought zone, it is often the start of several bullish months.
Bitcoin, a leading indicator?
Bitcoin is one of the assets that is quite sensitive to economic cycles, that is to say, growth cycles and slowdown cycles. When we have a growth acceleration cycle, bitcoin tends to outperform and vice versa during an economic downturn. This kind of situation improves consumer sentiment and increases demand. This is what generates the biggest bullruns. We can see in the graph below that major bullruns often coincide with a rebound in economic growth. When growth accelerates, demand increases, which translates into higher prices.
We could consider bitcoin as a leading indicator because it tends to make a top even before the financial markets, and it tends to moderate its downtrend when we have an economic bottom. It is closely linked to economic cycles. Moreover, even the halving process is close to an economic cycle since it occurs every 4 years. An economic cycle is approximately 5 years on average. The halving process makes it possible to reduce the supply every 4 years to ensure a certain upward dynamic. Moreover, all the elements below make it possible to have a long-term upward dynamic:
1/ The supply of bitcoin is limited (21 million)
2/ The supply decreases every 4 years (preserve the scarcity of bitcoin)
3/ Constant demand (democratization of bitcoin, institutionalization)
The craze following the officialization of bitcoin ETFs
One of the biggest issues of 2024 was the approval of the bitcoin ETF. This process will bring many more flows to the bitcoin market. Moreover, we can see that the demand for different bitcoin ETFs is increasing more and more. This is a sign of interest.
The institutionalization of bitcoin will help adoption. This will also help convince the most skeptical. Therefore, it remains an argument for options traders to go for an ATH.
However, even though we have had strong enthusiasm following the approval of ETFs, we can see that the trend of searches for bitcoin on GOOGLE still remains weak. Therefore, the FOMO process is not yet present like in 2020-2021. This could just start to come back when we have made an ATH.
Halving, a bullish catalyst?
Halving is a process that happens every 4 years and is specific to bitcoin. It consists of halving (i.e. 50%) the reward for validating a block and adding it to the blockchain. Until then, the miner could receive 6.25 bitcoin, and this figure will be reduced to 3.125%. The next halving is scheduled for April 2024. In the past, this type of event has often led to a bitcoin rally. This can be seen in the graph below. On the other hand, the purpose of halving is to preserve the scarcity of bitcoin.
CONCLUSION
Generally speaking, there are several catalysts and factors that can positively influence bitcoin in 2024. It is also for all these reasons that speculators are making bets on option strike prices beyond of the last ATH. This can be explained both by the fact that speculators have a bullish view but also by the fact that the price of options can be cheaper when the strike price is far away.
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