Crypto Options Market Flashes Bitcoin Warning As Silvergate Ends Operations
The decision by crypto-friendly bank Silvergate (SI) to wind down operations amid the worsening macroeconomic picture has raised concerns among digital asset investors, spurring demand for derivatives that provide protection against price crashes in major tokens.
At press time, the 30-day bitcoin bias, derived by looking at the difference in implied volatility/demand for cheap out-of-the-money (OTM) calls and OTM put options expiring in four weeks, shows the strongest bearish put bias at over two months.
It’s a sign that investors are concerned about a deeper fall in the bitcoin price and are buying put options to hedge their long spot or futures positions, or simply looking to profit from potential bearish price action.
“BTC 25d bias is firmly back to put > calls on shorter dates as it feels upside momentum has been sucked out of the market,” Paradigm, an institutional liquidity network for crypto derivatives traders, said in a market update early Thursday.
A call option gives the buyer the right, but not the obligation, to buy the underlying asset at a predetermined price on or before a specified date. A put option gives the right to sell. A long position is one where an investor owns the asset.
The renewed put bias appears to be justified, considering that market depth for US dollar trading pairs has worsened amid the bitcoin price decline. This means that a small sell order can lead to an oversized price drop. Depth refers to the market’s ability to absorb large buy and sell orders at stable prices.
“USD market depth has fallen almost as much as BUSD’s over the past month. Following the BUSD news, liquidity for the top pairs fell more than 40% before recovering. Meanwhile, Silvergate news is weighing on the USD pairs,” Paris-based crypto. data provider Kaiko tweeted.
Bitcoin has fallen to a three-week low below $21,000 in the past 24 hours, extending its decline from peaks above $25,000 reached last month.
The sell-off can be attributed to the Silvergate crisis and subsequent fears of a liquidity drain, the sharp hawkish price reduction of interest rate expectations by the Federal Reserve and operational bottlenecks at major exchanges.
The 30-day bitcoin skew has fallen to -3.62, the lowest since January 7, a chart provided by Amberdata shows. The 60- and 90-day metrics fell to two-month lows of -2.72 and -1.58%, respectively.
A similar pattern has been observed in options related to ether, the second largest cryptocurrency by market capitalization, despite the hype surrounding Ethereum’s impending Shanghai upgrade.
“Paradigm flows have been dominated by puts in both BTC and ETH. Skew favors Puts>Calls out to 90 days for BTC and out to 180 days for ETH,” Paradigm said on its Telegram channel.
