Bitcoin is bracing for a $6 billion quake as options expiration approaches

Despite some bold bitcoin price predictions, bitcoin and cryptocurrency prices have fallen this week, wiping over $200 billion from the combined crypto market.

Since Monday, the bitcoin price has dropped roughly 6%, from around $52,000 per bitcoin to around $46,000 before rising marginally. Other significant cryptocurrencies, including ethereum, Binance’s BNB, solana, cardano, and XRP, have all fallen in value recently, with XRP losing about 20% of its value in the previous week.

Now, bitcoin traders are bracing for a $6 billion option contract to expire on New Year’s Eve, one of the year’s largest option expirations that might fuel market volatility.

The large bitcoin options expiry is expected to cause price volatility, with previous large expiries attracting investor attention and analysts predicting that the expiry will cause investors to either double-down on risky bets or unwind their positions, causing concern among already nervous investors.

“Whilst bitcoin’s overall trading volumes were consistent, a total of 129,800 option contracts (with value of just over $6 billion) are set to expire on the 31st December which is believed to be fuelling overall wary sentiment for the short term,” Adrian Kenny, senior sales trader at the U.K.-based digital asset broker GlobalBlock, wrote in a note this week.

The price of bitcoin has dropped by little over 30% from its all-time high in November. While ethereum, the second-largest cryptocurrency behind bitcoin, has fared better, with a 20% drop from its high, smaller cryptocurrencies such as Binance’s BNB, solana, cardano, and XRP have witnessed even steeper drops.

According to Skew statistics originally published by Coindesk, some 130,000 bitcoin options contracts—bets on the future bitcoin price that allow traders to purchase or sell the cryptocurrency at a predetermined price within a set time period—are slated to expire on Friday.

Bitcoin is thought to move toward the so-called max pain point in the days leading up to an options expiry, followed by a strong directional move in the days following settlement, as traders push the spot price closer to the strike price at which the greatest number of open options contracts expire worthless, resulting in maximum losses (max pain) for option buyers. According to statistics initially reported by Coindesk from Cayman Islands-based crypto financial services business Blofin, the maximum pain threshold for New Year’s Eve’s options expiry is $48,000.

Other market analysts concerned about a drop in the price of bitcoin, ethereum, Binance’s BNB, solana, cardano, and XRP have referred to multiple crypto exchanges barring customers from China on Friday as a result of the country’s current crackdown.

“Bitcoin’s recent downturn came as the year draws to an end and several crypto exchanges gear up to implement a ban on users from China,” Joe DiPasquale, chief executive of bitcoin and crypto hedge fund BitBull Capital, said in emailed comments.

“The selling pressure has been mounting ahead of that ban as users from China seek to sell crypto and convert to fiat before the December 31 deadline. We can expect relief moving into the new year and a possible recovery drive. However, the sustainability of any recovery will depend on market sentiment and underlying dynamics at the time.”

Huobi, one of China’s top bitcoin and cryptocurrency exchanges, said in September that it was working toward a deadline of December 31, 2021 “to terminate current China user accounts” after a slew of prominent Chinese government entities issued a severe warning to exchanges.

In the spring, news of China’s newest crypto crackdown sank the bitcoin and crypto markets, causing China-based crypto miners—who use powerful computers to protect blockchain networks in exchange for newly minted coins—to disperse throughout the globe.

The large bitcoin options expiry is expected to cause price volatility, with previous large expiries attracting investor attention and analysts predicting that the expiry will cause investors to either double-down on risky bets or unwind their positions, causing concern among already nervous investors.

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