S&P

A crumbling stock market could create profitable opportunities for Bitcoin traders

U.S. tech giants are set to report their second quarter earnings throughout October, presenting a scenario that could possibly benefit Bitcoin.

Some of the biggest companies in the world are expected to report their 2Q earnings in October, including electric automaker Tesla on Oct. 18, tech giants Meta and Microsoft on Oct. 24, Apple and Amazon on Oct. 26 and Google on Oct. 30. Currently, the possibility of an even more severe global economic slowdown is in the cards and lackluster profits could further add to the uncertainty.

Given the unprecedented nature of the United State Federal Reserve tightening and mounting macroeconomic uncertainties, investors are afraid that corporate profitability will start to deteriorate. In addition, persistent inflation continues to force businesses to cut back on hiring and adopt cost-cutting measures.

Strengthening the dollar is particularly punitive for U.S. listed companies because their products become more expensive in other countries and the reduced revenue brought in from overseas negatively impacts the bottom line. Google, for instance, is expected to grow revenues by less than 10%, down from a 40% growth in 2021.

The companies that comprise the S&P 500 account for an aggregate $32.9 trillion in value and crypto investors expect some of those bets to enter Bitcoin (BTC) if earnings season fails to sustain a modest growth — signaling the stock market should continue to underperform.

From one side, traders face the pressure from Bitcoin’s correlation to equities, but on the other hand, BTC’s scarcity might shine as inflation concerns arise. This possibly creates an immense opportunity for those betting on a BTC price rally, but extreme caution would also be needed for those opening positions.

Risk averse traders could use futures contracts to leverage their long positions but they also risk being liquidated if a sudden negative price move occurs ahead of the corporate earnings calendar. Consequently, pro traders are more likely to opt for options trading strategies such as the “long butterfly.”

By trading multiple call (buy) options for the same expiry date, traders can achieve gains thre times higher than the potential loss. This options strategy allows a trader to profit from the upside while limiting losses.

It is important to remember that all options have a set expiry date, so the asset’s price appreciation must happen during the defined period.

A cautionary approach to using call options

Below are the expected returns using Bitcoin options for the Oct. 28 expiry, but this methodology can also be applied using different time frames. While the costs will vary, the general efficiency will not be affected.

*Profit / Loss estimate. Source: Deribit Position Builder*

This call option gives the buyer the right to acquire an asset, but the contract seller receives (potential) negative exposure. The “long butterfly” strategy requires a short position using a call option, but the trade is hedged on both sides — limiting the exposure.

To initiate the execution, the investor buys 13 Bitcoin call options with a $20,000 strike and sells 24 contracts of the $23,000 call. To finalize the trade, one would buy 10.5 BTC contracts of the $26,000 call options to avoid losses above such a level.

Derivatives exchanges price contracts in BTC terms, and $19,222 was the price when this strategy was quoted.

Using this strategy, any outcome between $20,690 (up 7.6%) and $26,000 (up 35.3%) yields a net profit — for example, the optimal 20% price increase to $23,000 results in a 1.36 BTC net gain, or $24,782 at current levels. Meanwhile, the maximum loss is 0.46 BTC or $8,382 if the price on Oct. 28 expiry happens below $20,000.

The “long butterfly” strategy provides a potential gain that is three times larger than the maximum loss.

Overall, the trade yields a better risk-to-reward outcome than leveraged futures trading, especially considering the limited downside. It certainly looks attractive for those expecting deteriorating business conditions for listed companies.

It is worth highlighting that the only up front fee required is 0.46 BTC, which is enough to cover the maximum loss.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Here’s why holding $20.8K will be critical in this week’s $1B Bitcoin options expiry

BTC bulls were liquidated in last week’s drop to $20,800, meaning even more downside could occur if this level fails ahead of this week’s $1 billion options expiry.

Bitcoin (BTC) experienced a 16.5% correction between Aug. 15 and Aug. 19 as it tested the $20,800 support. While the drop is startling, in reality, a $4,050 price difference is relatively insignificant, especially when one accounts for Bitcoin’s 72% annualized volatility.

Currently, the S&P 500’s volatility stands at 31%, which is significantly lower, yet the index traded down 9.1% between June 8 and June 13. So, comparatively speaking, the index of major U.S.-listed companies faced a more abrupt movement adjusted for the historical risk metric.

At the start of this week, crypto investors’ sentiment worsened after weaker conditions in Chinese real estate markets forced the central bank to reduce its five-year loan prime rate on Aug. 21. Moreover, a Goldman Sachs investment bank strategist stated that inflationary pressure would force the U.S. Federal Reserve to further tighten the economy, which negatively impacts the S&P 500.

Regardless of the correlation between stocks and Bitcoin, which is currently running at 80/100, investors tend to seek shelter in the U.S. dollar and inflation-protected bonds when they fear a crisis or market crash. This movement is known as a “flight to quality” and tends to add selling pressure on all risk markets, including cryptocurrencies.

Despite the bears’ best efforts, Bitcoin has not been able to break below the $20,800 support. This movement explains why the $1 billion Bitcoin monthly options expiry on Aug. 26 could benefit bulls despite the recent 16.5% loss in 5 days.

Most bullish bets are above $22,000

Bitcoin’s steep correction after failing to break the $25,000 resistance on Aug. 15 surprised bulls because only 12% of the call (buy) options for the monthly expiry have been placed above $22,000. Thus, Bitcoin bears are better positioned even though they placed fewer bets.

*Bitcoin options aggregate open interest for Aug. 26. Source: CoinGlass*

A broader view using the 1.25 call-to-put ratio shows more bullish bets because the call (buy) open interest stands at $560 million against the $450 million put (sell) options. Nevertheless, as Bitcoin currently stands below $22,000, most bullish bets will likely become worthless.

For instance, if Bitcoin’s price remains below $22,000 at 8:00 am UTC on Aug. 26, only $34 million worth of these put (sell) options will be available. This difference happens because there is no use in the right to sell Bitcoin below $22,000 if it trades above that level on expiry.

Bulls could secure a $160 million profit

Below are the four most likely scenarios based on the current price action. The number of options contracts available on Aug. 26 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $20,000 and $21,000: 1,100 calls vs. 8,200 puts. The net result favors bears by $140 million.
Between $21,000 and $22,000: 1,600 calls vs. 6,350 puts. The net result favors bears by $100 million.
Between $22,000 and $24,000: 5,000 calls vs. 4,700 puts. The net result is balanced between bulls and bears.
Between $24,000 and $25,000: 7,700 calls vs. 1,000 puts. The net result favors bulls by $160 million.

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

Holding $20,800 is critical, especially after bulls were liquidated in futures market

Bitcoin bulls need to push the price above $22,000 on Aug. 26 to balance the scales and avoid a potential $140 million loss. However, Bitcoin bulls had $210 million worth of leverage long futures positions liquidated on Aug. 18, so they are less inclined to push the price higher in the short term.

With that said, the most probable scenario for Aug. 26 is the $22,000-to-$24,000 range providing a balanced outcome between bulls and bears.

If bears show some strength and BTC loses the critical $20,800 support, the $140 million loss in the monthly expiry will be the least of their problems. In addition, the move would invalidate the previous $20,800 low on July 26, effectively breaking a seven-week-long ascending trend.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

S&P Global downgrades Coinbase credit rating for weak Q2 earnings, competitive pressures

Coinbase Global sees its credit rating downgraded by S&P Global amid regulatory pressures, weakened market performance and competitors.

Major American cryptocurrency exchange Coinbase saw its long-term issuer credit rating downgraded from BB+ to BB status by rating agency S&P Global following its latest earnings report this year.

The agency confirmed the downgrade in a note on Thursday, pointing toward Coinbase’s weaker performance in the second quarter of 2022 as a driving factor. Intensified competitive risk in the cryptocurrency exchange sector was also highlighted, with Coinbase losing market share to competitors this year.

“The negative outlook reflects uncertainties about the duration of the crypto market downturn and the company’s ability to operate efficiently by managing operating expenses prudently.”

The downgrade also reflected the potential for “further market share deterioration” driven by the competitive landscape and regulatory risk. The rating agency noted that total trading volume at Coinbase declined 30% quarter on quarter, while total cryptocurrency spot trading volume across all venues declined only 3%, leading to a lower market share.

The note conceded that spot trading has become more concentrated among market-makers and high-frequency trading firms, of which Coinbase has a far smaller market share.

The ongoing cryptocurrency bear market has also left its mark, with S&P Global highlighting total assets on Coinbase declining 63% to $96 billion from the first quarter, which has been driven by weakened cryptocurrency values and net outflows from institutional clients.

Binance’s move to do away with its Bitcoin trading fees around the world also led the rating agency to believe that Coinbase could be forced to review its own fee structures, which remain a major revenue source for the company:

“We believe higher trading fees at Coinbase compared with peers, combined with such aggressive pricing actions by competitors, could increase the risk of fee compression in its retail channel (which generated about 80% of the company’s total revenues in the first half of 2022).”

Regulatory pressures are also a concern, with Coinbase under the scrutiny of ongoing investigations into its staking programs and classification of various listed cryptocurrency tokens. A former Coinbase employee was also charged with securities fraud by the U.S. SEC in July 2022, putting the exchange further under the microscope.

Despite the downgrade, S&P Global expects Coinbase to maintain “low overall risk” despite macro factors that have exacerbated the recent cryptocurrency market downturn.