Twenty-three painful days have passed since Bitcoin (BTC) last closed above $32,000 and the 10% rally that occurred on May 29 and 30 is currently evaporating as the price of BTC heads towards $30,000. A move back to $30,000 confirms the strong correlation of the traditional asset and over the same period, the S&P 500 also retreated 0.6%.
According to Citi strategist Jamie Fahy, weak corporate profits due to rising inflation and upcoming US Federal Reserve interest rate hikes could put pressure on the stock market. As in Yahoo! Finance to clients, Citi’s research note stated:
“Essentially, earnings per share expectations for 2022/2023 have barely changed, despite concerns about a recession.”
In essence, the investment bank is expecting a worsening macroeconomic situation to reduce corporate profits and, in turn, cause investors to short the stock market.
According to Jeremy Grantham, co-founder and chief investment strategist at GMOs, “We should be in a recession of some sort very early, and profit margins are a long way from the actual peak that they could fall.”
As the correlation with the S&P 500 remains incredibly high, bitcoin investors fear a potential stock market decline will inevitably lead to a retest of the $28,000 level.
The correlation metric ranges from a negative 1, meaning that select markets move in opposite directions to a positive 1, indicating a complete and symmetrical movement. The inequality or lack of relationship between the two properties will be denoted by 0.
Currently, the 30-day correlation between the S&P 500 and Bitcoin is 0.88, which has been the norm for the past few months.
Bearish bets are mostly below $31,000
Bitcoin’s recovery of over $31,000 on May 30th surprised the bears as only 20% of put (sell) options for June 3rd have been placed above such price levels.
Bitcoin bulls may be fooled by recent resistance test of $32,000 And his bet goes up to $50,000 for the $825 million options expiration.
A broader approach using a 0.77 call-to-put ratio shows more bearish bets as put (sell) open interest is $465 million against $360 million of call (buy) options. Still, most bearish bets may turn out to be worthless as Bitcoin is currently trading above $31,000.
If the price of bitcoin stays above $31,000 at 8:00 a.m. UTC on June 3rd, then only $90 million worth of put options will be available. This difference occurs because the right to sell bitcoin for $31,000 is of no use if it trades above that level at expiration.
The Bull Could Make a Profit of $160 Million
Below are the four most likely scenarios based on current price action. The number of options contracts available on June 3 for call (bull) and put (bear) instruments varies depending on the expiration price. The imbalance in favor of each of the parties constitutes the theoretical advantage:
- Between $29,000 and $30,000: 1,100 call vs 5,100 put. The net result favors the bears at $115 million.
- Between $30,000 and $32,000: 4,400 call vs 4,000 put. The net result is balanced between Call (Buy) and Put (Sell) instruments.
- Between $32,000 and $33,000: 6,600 Call vs 1,600 Put. The net result supports the bulls at $160 million.
- Between $33,000 and $34,000: 7,600 call vs 800 put. The Bulls increased their profit to $225 million.
This crude estimate considers call options used in bullish bets, and especially put options used in neutral-to-bearish trades. Still, this over-simplification disregards more complex investment strategies.
Bears Require Lower Margins to Suppress Bitcoin Price
Bitcoin bears need to keep pressure on the price below $30,000 on June 3 to secure gains of $115 million. On the other hand, the bulls’ best case requires a push above $33,000 to increase their profit to $225 million.
However, according to data from Coinglass, on May 29, Bitcoin Bears had a leveraged short position of $289 million. As a result, they have less margin required to drive the price down in the short term.
Additionally, the most likely scenario is a draw, which could see the price of bitcoin near $31,000 before the June 3 option expires.
The views and opinions expressed here are solely those of Author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making a decision.