Traders seeking to divine Bitcoin’s next major price swing need look no further than the derivatives market, specifically options contracts.
That’s according to Nick Forster, founder of DeFi derivatives protocol, Derive, who told Decrypt on Monday that the options market is beginning to see “reflexivity season kick in.”
Reflexivity refers to the idea that market participants' actions and expectations influence asset prices, and in turn, changing prices affect participants' behavior, creating a feedback loop.
The founder pointed to the 30-day call/put skew for Bitcoin options contracts as continuing to “track higher,” meaning traders are betting heavily on upside volatility and are pricing in more significant market swings.
“As prices rise, traders are expecting a continued momentum, driving a self-reinforcing cycle of higher prices,” Forster explained, adding that those traders are punting on a price between $80,000 and $90,000 by November’s end.
“The current market sentiment is positioning for potential volatile moves as we approach key political and economic events,” Forster said, referring partly to the upcoming U.S. presidential election.
It’s welcome news for those accustomed to wild bouts of volatility for the world’s largest crypto, which has, in recent months, oscillated between $53,000 and $64,000. The asset is down 1.5% on the day to $63,000, CoinGecko data shows.
Though the options market has remained relatively small compared to billions traded daily in the spot market, that could soon change as larger traditional players begin incorporating the contracts into their trading strategies alongside speculation in U.S.-based Bitcoin exchange-traded funds.
Options are financial derivatives that give the buyer the right, but not the obligation, to buy or sell an asset at a specific price before or on a specified date.
They allow traders to hedge risk or speculate on price movements with a limited downside by paying a premium, while the potential for gains can be significant.
On Friday, the Securities and Exchange Commission greenlit a rule change request by Nasdaq’s International Securities Exchange to list and trade options on the iShares Bitcoin Trust (IBIT), BlackRock’s popular ETF.
While BlackRock’s Bitcoin ETF options approval will likely lead to long-term skew compression or muted volatility, as traditional financial traders eventually sell covered calls, the impact is yet to be felt, Forster said.
“For now, we’re still seeing a strong bid for upside as traders capitalize on the current volatility yields,” he said.