Over the years, Bitcoin investors have used the expiration dates of the options market to predict where the spot price will go at the end of the month. As we near the end of July, expect even more predictions and charts explaining how puts and calls will affect the future price of BTC as the monthly options expire on July 30th.
The crypto options market is not all speculation, however. Over the past year, the options market has spawned several innovations that improve trading, security, and overall liquidity.
The crypto market has lost over 50% of its total market value since its all-time high in May, causing rumblings across the field. However, over the months, BTC analysts have always been optimistic that an upcoming option expiration (usually on the last Friday of the month) will offer a different trajectory and drive Bitcoin prices higher.
Before we dig deeper, it is important to know what options, options trading, and the key concepts in the options market are. We’ll then explain why the upcoming options expiration could be a major turning point for Bitcoin and the crypto market. Finally, let’s look at some of the innovations in the crypto options market and improve the traditional switches for options trading.
Understand the Bitcoin Options Market
An option is a contract that allows (but is not required) an investor to buy or sell an underlying asset such as bitcoin, real estate, oil, ETFs, etc. Buying an option that allows you to buy shares at a later date is called a “call option,” while buying an option that allows you to sell shares at a later date is called a “put option.” ” referred to as.
Options are typical “long” buys, which means that if you bet the price will go up or down, you will still buy the option. The cost of the option is referred to as a “premium” which is a fraction of the “exercise price” or the price of the asset at expiry.
So why should an investor be keen on the upcoming monthly options expiration date in July and could this event affect the price of Bitcoin? With around $ 5 billion in open contracts expiring later this month, analysts are torn over the impact on price.
Bounce or break, that’s the question pic.twitter.com/qJyyXFSIIw
– PlanB (@ $ 100 trillion) July 19, 2021
The Max Pain Theory
Over the years, Bitcoin analysts have developed the “max pain theory” to predict the price of the asset at the expiration date of the options market. Put simply, the theory is that the market will tend towards the price that offers the greatest possible pain to option buyers.
Sellers cause this – usually institutions, high net worth clients, or experienced traders with high liquidity and high capital – who try to drive the price towards the maximum pain point by buying the asset on the spot or futures market when the options are near the expiration date stand.
This ensures that the maximum number of options expire worthless (i.e. buyers do not exercise their rights), which means a maximum loss of premiums, while option sellers benefit the most.
In other words, buyers of the BTC option (both puts and calls) that expire on July 30th (last Friday) will suffer a maximum loss when the Bitcoin price is around $ 35,000. On the other hand, option sellers (writers) will try to keep the price at that level for the highest profits.
Centralized exchanges like Deribit (which holds over 60% of the crypto options volume) have tightened the narrative of “option expiration week” as a major factor influencing future prices, as most options contracts expire at the same time (8:00 AM UTC). .
However, the price and value of Bitcoin are influenced by several factors, and focusing on the maximum pain point with options can’t tell the full story. In addition, the Bitcoin options market is still relatively small, so the process has a significant impact on the spot price.
Hence, a Twitter timeline full of future BTC price predictions derived from the “Max Pain Point Theory” could mislead many investors. The theory remains controversial, however, and some analysts argue whether the gravity of price toward the maximum pain point is a case of market manipulation or sheer coincidence.
Innovations in the crypto options trading market
Price theories and predictions are rife during this bear market as investors reach for straws to push the market back to its all-time highs. Nevertheless, with the waning euphoria and the resurgence of the BUILT lifestyle, the market has found a balance – innovations and developments are coming onto the market.
The Decentralized Finance (DeFi) ecosystem grew exponentially in the first half of the year as projects like AAVE, Yearn Finance, The Graph, and decentralized exchanges like Uniswap, Sushiswap, Pancakeswap, and decentralized options markets like Hegic and Premia came into the room.
“A revolution in the options market”
Established in 2020, Premia Finance is one of the exchanges leading the revolution in the options market. During its short lifespan, the platform introduced a decentralized exchange that allows users to coin their options, set the options to earn tokens, and increase security for both buyers and sellers.
With its innovative and decentralized structure, Premia enables users to create custom call / put options for multiple supported assets, including expiration, strike price and quantity. This opens up the field for every investor to become an option writer or buyer.
In addition, the platform also improves participation in the options market by rewarding users who provide liquidity with incentives. In contrast to the traditional options markets, which are centralized and charge customers high fees, Premia introduces a low fee structure when buying options, all of which are distributed to the holders of staking lots.
Finally, the transition to the decentralized options trading market could be the catalyst to calm the wild speculation surrounding the options expiration week. The “Max Pain Point Theory” would fall into its ways, as it does not encourage the option seller to manipulate the market before the option period expires.
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