Bitcoin’s Put-Call Ratio Hits 9-Month High, but That’s Not Necessarily Bearish

The spike may be being fueled by increased put selling, which is usually done when the market is expected to consolidate, or rally.

Mar 12, 2021 at 11:00 a.m. UTC
Updated Sep 14, 2021 at 12:25 p.m. UTC

Bitcoin's put-call open interest ratio, which measures the number of put options, or bearish bets, open relative to calls, or bullish bets, is rising. However, that does not imply traders are positioning themselves for a drop in the market.

The ratio jumped to 0.91 on Thursday, the highest level since June 26, 2020, according to data provided by the crypto derivatives research firm Skew. 

The metric has been rising since the beginning of the year. The spike, however, may have been fueled by increased put selling, which is usually done when the market is expected to consolidate or rally. 

Bitcoin's one-month implied volatility, or investors' expectations for price turbulence over four weeks, spiked to record levels in early January, boosting options prices, and remained elevated above its lifetime average of 100% (annualized) until last week. 

Traders, therefore, had a strong incentive to sell put options at high prices during that bull run. Volatility essentially represents uncertainty and has a positive impact on options prices. The one-month implied volatility is now hovering below 100%. 

Open interest only tells us the number of calls and put contracts that are active, or open, at a given point in time and does not reveal whether investors are buying call/put options or selling (known as “writing” in options markets). 

The way the options are currently priced actually suggests bullish bias in the market. One-, three- and six-month put-call skews, which measure the cost of puts relative to calls, are hovering in negative territory, implying greater demand for bullish calls compared to puts. 

Indeed, the put-call skews have recovered from the bull market depths seen earlier this year and options market recently saw some put buying. Again that does not imply a bearish mood, as traders often buy put options as a hedge (protection) against bullish or long positioning in the spot or futures markets.

Lastly, the put-call open interest ratio is closing on parity, which means the market is heading toward neutral positioning. All-in-all, the spike in the put-call open interest ratio shouldn't be a cause for concern for the bulls. However, a continued rise in the U.S. 10-year Treasury yield may play spoilsport.

The yield has risen back to 1.6% today, making the U.S. dollar more attractive as an investment and putting a downward pressure on equities and other competing investments. Bitcoin fell sharply in the last week of February, as yields spiked, triggering risk aversion in traditional markets.

Bitcoin is currently trading near $56,100, having narrowly missed challenging the record high of $58,332 on Thursday, according to CoinDesk's Bitcoin Price Index. The pullback seen today could be associated with the jittery traditional markets. The U.S. 10-year yield has risen back to 1.6%, strengthening the dollar and pushing the European equities lower.

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