On Dec. 26, the largest expiration of Bitcoin options in history by "notional value" will take place.
Tomorrow will likely be boring and choppy because big institutions are forcing the price to stay still to maximize their profits on expiring contracts.
However, once that event is over and January begins, an explosive move upward could take place if there is no major bad news affecting the top crypto.
Massive expiry event
Roughly $23.7 billion in BTC options are expiring. When you add Ethereum (ETH) and others, the total is around $28 billion.
Options are contracts that give traders the right to buy (calls) or sell (puts) Bitcoin at a specific price by a certain date. When these contracts expire, they must be settled.
A $28 billion expiration means massive amounts of capital are tied up in these bets. Markets have to "hedge" their positions to avoid losing money.
Market makers (MMs) generally write (sell) the options that retail traders buy. MMs profit most when the options expire worthless. The price point where the most options expire worthless is called the "max pain" price.
MMs buy BTC when the price drops and sell BTC when the price rises to keep the market neutral. This makes it possible to manage risks.
This constant buying-low and selling-high by MMs creates a "suppressive" force. It keeps the price strictly range-bound.
"Uncolining spring"
Once the expiration moment passes (usually 8:00 AM UTC on Fridays), the MMs no longer need to hedge these positions. The "suppressive weight" is lifted. This usually leads to a return of volatility.
Before a possible move up, the market could drop briefly to "hunt liquidity." Algorithms push the price down to trigger "stop-loss" orders from nervous traders.
Historically, January sees an inflow of money, which is bullish for BTC.
A drop is considered unlikely since expirations are neutral-to-bullish (as a rule).
That said, "thin" markets are easier to manipulate. A relatively small order can move the price significantly because there are fewer buyers/sellers to absorb it.
Dan Burgin
Vladislav Sopov
U.Today Editorial Team