As Bitcoin’s price fluctuates, the strategies employed by options market makers could be key in maintaining stability against concerns related to soaring funding rates.
Market Overview
At present, Bitcoin (BTC) and the broader cryptocurrency realm are attracting notable enthusiasm for bullish leveraged positions, suggesting the market may be entering an overheated phase. The hedging strategies of market makers might help keep Bitcoin’s price hovering around the $100,000 mark. However, this uptick in activity also raises the odds of price corrections within other digital currencies.
Recently, Bitcoin soared past an all-time high of $103,000, fueled by former President-elect Donald Trump’s announcement of Paul Atkins, a crypto-friendly figure, as his nominee for SEC chair. This surge ignited traders, pushing them towards this bullish trend and subsequently elevating funding rates for perpetual futures. These rates reflect both a rise in demand and the pressure from a heavily long position environment. In such scenarios, even a slight market dip could lead to significant liquidations, forcing exchanges to execute sell-offs as margin calls loom, thereby amplifying market volatility.
Role of Market Makers
Griffin Ardern, head of options trading and research at cryptocurrency platform BloFin, indicated that market options could serve as a stabilizing factor during this volatile period. When the prices of options trend upward more rapidly than Bitcoin itself—signifying a positive gamma imbalance—market makers tend to offload some of their holdings to keep their exposure in check. On the flip side, in a negative gamma situation, they may increase their holdings, which counterbalances extreme price fluctuations.
Ardern posits that, in the short term, Bitcoin might sustain its value around $100,000—a feat possibly aided by the hedging efforts from market makers. He believes that support from the options market could mitigate the repercussions of any potential deleveraging.
Market Risks and Future Trends
The annualized funding rate for Bitcoin has skyrocketed to nearly 100%, outpacing even speculative assets like DOGE. Other cryptocurrencies like XRP, CRO, and XMR are also reporting funding rates that exceed 100%.
Felix Hartmann, the founder and managing partner at Hartmann Capital, weighed in on the market’s health, noting that recent trading volume suggests considerable investment activity, particularly from MicroStrategy’s Michael Saylor, the largest public holder of Bitcoin. Hartmann noted that the upward price movements may largely stem from leveraged trading, cautioning that a 20-30% correction in this bull market isn’t out of the question.
He emphasized that to sustain upward momentum in the market, ongoing demand beyond MicroStrategy’s acquisitions is essential. Many social media observers echoed this sentiment, suggesting that the rally must persist to justify maintaining bullish positions; otherwise, a swift decline could be imminent.
Despite the backing from market makers, Bitcoin’s volatility is likely to intensify as the year draws to a close. Ardern pointed out that the positive gamma effects around the $105,000 level for options expiring on December 27 could bolster market stability. However, he also expected a rise in price uncertainty following the expiration as beneficial influences dissipate.
To clarify, options are financial derivatives allowing the buyer the choice, but not the necessity, to purchase or sell an asset at a specified price before a predetermined date. Specifically, a call option grants the right to buy, while a put option offers the right to sell.
Source: Coindesk
