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Record $14B Bitcoin Options Expiry Triggers Fear in Leveraged Crypto Market

Learn how the $14B Bitcoin options expiry this Friday could reshape the leveraged crypto market. Explore key metrics, volatility, and Ethereum trends.

The crypto market is bracing for a seismic shift as the largest-ever Bitcoin options expiry looms, set to shake up an already volatile landscape. Scheduled for Friday at 8:00 UTC, this expiry involves $14 billion worth of Bitcoin options, representing a significant 44% of total open interest across all maturities.

The implications of this event could redefine the market narrative as traders navigate the year-end with caution and anticipation.

The Mechanics of Bitcoin Options Expiry

Options are derivative contracts that allow traders to speculate on an asset's future price. A call option grants the right to buy, while a put option provides the right to sell. On Friday, 146,000 Bitcoin options contracts—each sized at one BTC—will expire on Deribit, the world’s leading crypto options exchange.

Notably, Deribit accounts for over 80% of the global crypto options market, underscoring its critical role in this high-stakes event. Alongside Bitcoin, Ethereum (ETH) options worth $3.84 billion are also set to expire, adding another layer of complexity to the market's outlook.

Unpacking the $4 Billion ITM Impact

An estimated $4 billion worth of Bitcoin options are currently "in the money" (ITM), meaning these contracts are poised to generate profits for holders. This accounts for 28% of the total open interest.

Positions expiring ITM could be squared off or rolled over to January or March expiries, potentially amplifying market volatility. Simranjeet Singh, portfolio manager at GSR, commented, "We expect significant open interest in BTC and ETH to roll into future expiries, providing liquidity anchors for the new year."

The put-call open interest ratio for Friday’s Bitcoin options expiry stands at 0.69, indicating a heavier tilt toward call options. This suggests that leveraged traders are betting on an upside, although recent price action has cast doubt on those bullish expectations.

Why Bitcoin Bulls Are Losing Steam

Bitcoin’s price has declined by over 10% to $95,000 since last week’s Federal Reserve meeting, where Chairman Jerome Powell ruled out the possibility of Fed purchases of cryptocurrency. This policy stance, coupled with fewer projected rate cuts in 2025, has weighed heavily on market sentiment.

"The bullish momentum that dominated earlier this year has stalled, leaving the market heavily leveraged to the upside," said Luuk Strijers, CEO of Deribit. "This raises the risk of a rapid sell-off if bearish pressure escalates."

Leveraged bullish bets are now at risk of magnified losses, and traders exiting these positions could exacerbate volatility.

Elevated Volatility Metrics Add to Uncertainty

The market's volatility of volatility (vol-of-vol)—a measure of fluctuations in price turbulence—remains elevated. This metric highlights the market's sensitivity to news and economic data, which could trigger rapid position adjustments and hedging strategies.

Strijers added, "The annual Bitcoin options expiry is set to conclude a remarkable year for bulls. However, heightened vol-of-vol signals persistent directional uncertainty."

Ethereum Faces a More Bearish Outlook

Compared to Bitcoin, Ethereum appears to be under greater bearish pressure. According to Andrew Melville, research analyst at Block Scholes, ETH’s implied volatility for call options has dropped significantly, reflecting reduced demand for bullish bets.

The put-call skew ratio for ETH is currently more bearish than Bitcoin’s, with a 2.06% tilt in favor of puts versus a relatively neutral 1.64% for BTC.

Melville explained, "ETH has faced weaker spot performance for over a week, and its options skew indicates a stronger bearish sentiment heading into 2025."

What’s Next for the Crypto Market?

As the Bitcoin options expiry unfolds, traders must prepare for heightened volatility and potential market shifts. The outcome of this record-breaking event could have ripple effects on price trends, sentiment, and positioning as the new year begins.

The heavy tilt toward bullish bets suggests that the market could experience significant turbulence if bearish forces gain momentum. Additionally, the broader implications for Ethereum, which faces a more subdued outlook, highlight the evolving dynamics within the crypto ecosystem.