Impending macroeconomic concerns and this week’s $1 billion options expiration threaten the price of this altcoin. Here are the details…
Investors try to avoid risk
The altcoin price tumbled below the $1.8k support as Ethereum bears prepare for Friday’s $1 billion options expiration. Ethereum’s performance over the past three months has been unsatisfactory for its holders, and the nearly 50 percent correction since April 3 has caused ETH to test the $1,800 support for the first time since July 2021.
While investors are investing in the US dollar due to the volatility in stocks, the DXY index reached its highest level in 20 years on May 13, as we reported on Kriptokoin.com. reached. DXY measures the USD against a basket of major foreign currencies, including the British Pound (GBP), Euro (EUR) and Japanese Yen (JPY). Also, the five-year U.S. Treasury yield hit its highest level since August 2018, trading at 3.10 percent on May 9. Thus, it signaled that investors are demanding larger returns to compensate for inflation. In a nutshell, macroeconomic data reflects risk-averse sentiment from investors, which partly explains the decline of leading altcoin ETH.
Altcoin price correction hit these investors
The May 25th realignment of Ethereum’s Beacon Chain created more panic among ETH investors. A valid transaction sequence was removed from the chain due to a competing block gaining greater support from network participants. Fortunately, this is not an uncommon occurrence and could have been caused by a high-resource miner or a bug. According to the data, the main victims of Ethereum’s 11 percent price correction were leverage investors (long futures), which saw a total liquidation of $160 million on derivatives exchanges.
Ethereum’s open interest for May monthly option maturity is $1.04 billion. However, the real figure will be much lower as the bulls are overly optimistic. These traders may have been deceived by the short-lived jump to $2,950 on May 4, as their investment is now over $3,000 for the May 27 options expiration. The drop below $1,800 surprised the bulls as almost none of the buy options for May 27 were placed below this price level. The buy-to-ask ratio of 0.94 indicates a slight dominance of the $540 million put (sell) open interest versus the $505 million buy (buy) options. However, as ETH is holding close to $1,800, any bullish bet is likely to become worthless.
$1,800 is important for bears and bulls
If the leading altcoin price stays below $1,800 at 11:00 on May 27, none of the $505 million options will be exercised. This difference is due to the fact that if ETH trades below this level when it expires, the right to buy ETH at $1,800 or higher is worthless. Below are the three most likely scenarios based on the current price action. The number of options contracts available on May 27 for buy (bullish) and put (bear) options varies depending on the expiry price. Imbalance in favor of both parties creates theoretical profit:
- Between $1,600 and $1,700: 0 calls vs. 230,000 idols. Net result supports sales (bear) of $370 million.
- Between $1,700 and $1,800: 50 calls vs. 192,300 puts. The net result supports the bears by $325 million.
- $1,800 to $2,000: 3,300 calls etc. 150,000 placements. Net result supports the bears by $280M
This rough estimate considers put options used on bearish trades and call options only on neutral-bullish trades. Even so, this oversimplification ignores more complex investment strategies. For example, a trader could sell a put option, effectively gaining positive exposure to ETH above a certain price, but unfortunately there is no easy way to predict this effect. Ethereum bears need to keep the price below $1,800 on May 27 to make a profit of $325 million. On the other hand, the best-case scenario for the bulls requires breaking above $1,800 to reduce the loss by $45 million. ETH bulls had $160 million leveraged longs liquidated on May 26, so they should have less margins to push the price up. However, the bears will no doubt try to suppress ETH below $1,800 before the May 27 options expiration.
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