Hedge Funds Pile Back Into Crypto Call Options After ‘Horrific’ Liquidations

(Bloomberg) — Cryptocurrency investors are returning to bullish bets in the options market after one of the worst bullish positions this year was liquidated over the weekend.

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Investors on both offshore exchanges and over-the-counter exchanges in the U.S. are buying call options that give them the option to buy Bitcoin at a price of $90,000 or more later this year, according to market participants.

According to Coinglass, about $1.1 billion in crypto bets were liquidated on Aug. 4, one of the biggest sell-offs this year. Bitcoin fell as much as 17% in the sell-off that began during Asian trading hours, and Ether lost more than a fifth of its value at one point. Both traded higher on Tuesday. About 50% of open interest in crypto derivatives was liquidated during the sell-off, according to Yevgeniy Feldman of SwapGlobal, which provides primary brokerage and clearing for institutional investors.

“People were overliquidating long positions, it was terrible,” Feldman said. “But on Monday and Tuesday, U.S. hedge fund and institutional participants trading options via OTC desks resumed making bullish options bets by buying call spreads on Solana and Bitcoin.”

Feldman said one of the key drivers behind the recovery is rising demand for Bitcoin on Coinbase Global Inc. This can be seen in the bid-offer ratio, where the total amount of commitments to buy Bitcoin far outpaces those intending to sell, according to the exchange’s order book data compiled by SwapGlobal.

“These imbalances suggest that there are tremendous buyers waiting at $49,000 and below,” Feldman said. Bitcoin fell to $49,212 on Monday, its lowest level since February.

Hedging against a short-term, lower price has grown rapidly on offshore exchanges over the past few days. The put-call ratio on Deribit remains high, with more puts bought than calls over the past 24 hours. Put buying tends to be more pronounced on exchanges because retail investors using such platforms tend to trade crypto in and out of the asset class with more hedging in options than U.S.-based institutions. These institutions hold large amounts of Bitcoin and use OTC desks, Feldman said.

“While the trends largely support puts ahead of the curve, the post-election trends remain in call even after the sell-off,” said Ravi Doshi, head of markets at primary brokerage FalconX. “As has been the case for most of the year, investors remain bullish on Bitcoin in the second half of the year.”

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As of today, the September $90,000 calls, December $100,000 calls, and March $100,000 calls are the largest open interest strikes in the listed market, with a notional value of around $1 billion for just those three options, according to Doshi. Bitcoin was around 4.5% higher at $56,850 in New York on Tuesday.

The bullish trend towards cryptocurrencies towards the end of this year is partly supported by the increasing likelihood that Donald Trump, who has become a cryptocurrency advocate, will be elected to a second term as US president.

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