Bitcoin the market has been stuck in a rut for over a month, and investors chasing yield may be partly to blame.
Since mid-February, BTC has been trading in a range centered around $70,000. Some observers say countervailing forces have been at play. The Iran war-led haven demand has supported BTC around $65,000, while rising US Treasuries have held back big gains above $75,000.
But another factor appears to have quietly kept bitcoin trapped in its range, and that is tied to investors using call options to generate additional returns on top of their spot market holdings.
“Throughout Q1, institutional participants have systematically overwritten calls for higher strikes to reap premiums in a bearish/sideways market. This activity transferred significant gamma exposure to traders, who have hedged by buying into dips and selling into rallies to maintain delta neutrality,” James Harris, CEO of Tesseract, the MiCA-licensed digital asset manager.
Options are derivative contracts that give you the right to buy or sell the underlying asset, in this case BTC, at a predetermined price at a later date. A call option gives the right to buy and represents a bullish market bet. A put option provides protection against price declines in BTC.
Think of it like booking a concert ticket today for a small fee. You can buy it later at the reserved price, even if the ticket goes up, or sell your reservation to someone else for a profit. Meanwhile, the ticket seller keeps the small fee.
That’s essentially what traders have done – they’ve become the ticket sellers. By selling call options, they collect premiums (the fee) while covering the call buyer on potential BTC price increases. And they do this against their existing bitcoin holdings. It’s called the covered call strategy, a way to generate extra income on top of spot holdings.
Now you might be wondering: what does this have to do with bitcoin’s range game? The answer lies in knowing that traders have shorted or sold these calls to market makers – the firms that take the other side of these options trades.
By selling these calls, traders have left market makers with a position called positive gamma, which essentially means that market makers are forced to buy BTC when prices fall and sell BTC when prices rise to stay hedged. The result? A range bound price action.
In other words, investors’ pursuit of yield has indirectly affected market inflows in ways that limit price volatility.
This also explains the drop in the bitcoin 30-day implied volatility index, BVIV, which contrasts with spikes in similar indices linked to stocks, bonds and oil. BVIV is down 5% to 56% this month.
“The effect has been a mechanical suppression of realized volatility – the DVOL index has compressed by about six points this week despite the macro backdrop,” Harris said.
