Bitcoin On Verge of ‘Violent’ Move After Surge Toward Record, Options Show

(Bloomberg) — After a breakneck run toward a record high this week, soaring demand for options appears to have left Bitcoin teetering on the verge of another parabolic run or a violent plunge.

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Bitcoin has jumped around 20% since last Friday. The seemingly endless demand for US exchange-traded funds that hold the token has traders raising bets that the record price of almost $69,000, last seen during the Covid pandemic, will soon be surpassed. Bitcoin was mostly little changed at about $62,000 on Friday.

“All things are pointing towards if momentum keeps us going up, then we could see another violent move upwards,” said Luke Nolan, a research associate at digital-asset manager CoinShares. But even a small change in ETF flows could cause people to quickly deleverage, “it works both ways,” he said.

An influx of buyers for short-dated options has increased Bitcoin volatility to the highest since last year’s collapse of crypto-friendly Silicon Valley Bank. The notional value of the March 29 call and put options contracts has climbed to around $7 billion, far above the amount of any other contracts on a specific expiration date, according to data from Amberdata.

The jump in short-term options that have strike prices in a relatively small range is laying the groundwork for a what’s called a gamma squeeze, in which a change in price can trigger a rapid swing in the market. The open interest for the contracts with the March 29 expiration date is clustered at $65,000, $60,000 and $70,000, a short distance from the current spot market price, according to data from Deribit.

“We can see still a huge amount of OTM (out of money) calls,” Nolan said. “If Bitcoin pushes to levels near that, then in my opinion we could certainly get a squeeze.”

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If a large amount of call options are bought, the sellers of the options, usually dealers or market makers, need to hedge their exposure. The usual way to hedge is to buy the underlying…