The $1 billion Bitcoin option contract will expire tomorrow. What will happen in the market?

Overview

• A large number of Bitcoin and Ethereum option contracts will expire on Friday.
• Some professionals say this may cause market volatility.
• Similarly, nothing may happen. In an option contract, traders are not obliged to purchase contract-related assets after the contract expires. According to data from Skew analytics, Bitcoin option contracts worth nearly $1 billion will expire this Friday, and the value of these contracts is slightly less than half of the existing contracts. Ethereum is also close behind. An ETH option contract worth approximately $450 million will expire on the same day.

This may introduce a large amount of cryptocurrency into the market when traders make the choice to sell or hold. The following is what might happen.

What is an option contract?

Option contracts allow people to buy Bitcoin at a pre-agreed price in the future. Therefore, if you sign an option contract when the value of Bitcoin is about $4,000 during the crash in mid-March, and get your Bitcoin at the same price on the last Friday of September, it will be a wise decision (or lucky Bet) because the price of Bitcoin has more than tripled.

This is also the premise of Bitcoin futures contracts. But the difference between the two is that the Bitcoin futures contract stipulates the contractual obligation to buy Bitcoin when the contract expires. In option trading, the trader is not obligated to buy all bitcoins in the contract, but only has the option to do so.

Back to the topic

Bitcoin options contracts are a big deal. On Derebit, the options trading platform with the largest trading volume, traders trade options contracts worth approximately $57 million a day. As of yesterday, about $2 billion worth of Bitcoin options contracts have not yet expired. This means that about half will expire on Friday. Ethereum contracts are similar.

So, what happens after the contract expires? According to a research report on ETH by Coin Metrics, "This event may increase the volatility of price movements this week because traders want to hedge their exposure to these positions or take pre-action in the spot market."

Charles Bovaird, a researcher at cryptocurrency research firm Quantum Economics, believes that the situation with Bitcoin is similar. "As these contracts approach their expiration dates, volatility may soar because investors will start choosing to buy, sell or let the contract expire."

Dan Gunsberg, CEO and co-founder of the cryptocurrency trading platform Hxro, said that most of the option contracts are priced between 11,000 and 12,000 US dollars, which is much higher than the current price of Bitcoin.

"By September 25, the market will actually give you 20:1 odds, and the transaction price will be at or over $11,000."

Reaching $11,000 is not breaking news; last Saturday, the price of Bitcoin was already slightly above $11,000. But anything higher than normal "may trigger some drastic changes." However, he said, "you can never predict cryptocurrencies."

Bovaird added:

"If a large number of contract holders buy Bitcoin before the contract expires, it will put upward pressure on the price of this cryptocurrency. Similarly, if the contract holders use options to sell, it will put downward pressure on the Bitcoin price."

"However, this may also have a small impact. If the option contract expires without being executed (used), then they will not put upward or downward price pressure on Bitcoin."