Bitcoin is crashing, but options markets are calling for $111K BTC price by February

Bitcoin (BTC) price experienced two episodes of $1 billion or higher futures market liquidations since Dec. 5, albeit its price began and ended the period near $97,000. The latest event moved Bitcoin from $101,430 on Dec. 8 to $94,200 on Dec. 9, a crash that wiped out $2.9 billion in leveraged positions.

Despite the short-term negative impact on sentiment, the Bitcoin derivatives market is presently in a much healthier state, which is precisely what’s needed for a surprise rally to a new all-time high. Traders are less likely to buy during signs of overheated markets, such as an excessive perpetual contract funding rate.

The aggregate Bitcoin futures open interest declined 8% between Nov. 25 and Dec. 10, from BTC 663,700 to the present BTC 609,400. But, given the impressive $7,160 Bitcoin 24-hour price decline on Dec. 9, the demand for leverage was relatively unaffected.

The funding rate peaked at 9% per month on Dec. 5 but basically went flat since the price crash to $94,200 on Dec. 9, washing out the excess retail leverage that typically fuels cascading liquidations. 

The drastic Bitcoin price volatility frightens new entrants and reduces the investment appeal. However, the reduced leverage provides more confidence to holders that the recent appreciation derives from accumulation, especially from institutional investors. 

Bitcoin eyes more gains as ETF inflows defy short-term fears

Traders fear that Bitcoin price could suffer after the 72% price gain in three months, but this short-term analysis fails to consider that the spot Bitcoin exchange-traded funds (ETFs) in the United States added $15.2 billion in assets since Oct. 10, indicating strong appetite.

MicroStrategy, Riot Platforms, and Marathon Digital (MARA) have been active Bitcoin buyers in recent weeks. Between Dec. 2 and Dec. 8, MicroStrategy purchased 21,550 BTC at an average price of $98,783 per Bitcoin, totaling $2.1 billion. Meanwhile, miner Riot Platforms raised $500 million in debt, earmarked primarily for Bitcoin acquisitions. MARA also significantly increased its holdings, adding 11,774 BTC to its balance sheet during the same period.

Unlike retail traders, whales and market makers remained optimistic as the Bitcoin monthly futures held 15% above the spot market price. Traders demand more money to compensate for the longer settlement period, so a 5% to 10% premium is typically deemed neutral.

Regardless if the Dec. 5 annualized premium of 21% was excessive, the current level is flat from two weeks prior, so whatever triggered the temporary leverage demand spike is no longer present. From a derivatives perspective, this scenario provides room for additional bullish positioning, favoring further price gains.

Related: Ray Dalio predicts global debt crisis, backs Bitcoin, gold

To further prove that pro traders did not flip bearish, a trader aiming to bet that Bitcoin price will be above $100,000 on Feb. 28 presently has to pay BTC 0.112, equivalent to $11,000, for a call option. In essence, the derivatives market is pricing BTC at $111,000 in less than 80 days.

The decline in Bitcoin futures open interest is certainly positive, but it would be naive to claim that excess bulishness has been wiped off the market. While there is nothing wrong in being optimistic, especially since President-elect Donald Trump’s inauguration is expected on Jan. 20, cryptocurrency traders often rely on leverage so normal price oscillations can cause additional unexpected volatility.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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