Bitcoin downtrend

Bitcoin Price Drop May Be a Bear Trap, Options Market Suggests

According to Omkar Godbole, at CoinDesk.com, Bitcoin downtrend may have its origin in current pandemia and be a short-live movement. Check it now:

Bitcoin is feeling the pull of gravity on Monday alongside losses within the classic markets.

At press time, bitcoin is changing hands near $9,080, representing a 2.7% decline on the day. Prices hit a three-week low of $8,910 through the early European trading hours, in accordance with CoinDesk’s Bitcoin Price Index.

Meanwhile, futures tied to the S&P 500 are down over 2.5% and major Asian and European equity market indices are inside the red alert, apparently over fears of a second wave of coronavirus infections in China.

The decline in bitcoin rates, however, could be short-lived, options market data suggests.

While bitcoin looks to be tracking equities lower, the top cryptocurrency’s put-call volume ratio has risen to three-month highs. At 1.79, the ratio currently stands at the highest value since the markets crash on March 12, based on data provided by crypto derivatives research firm Skew.

The put-call volume ratio is an indicator of relative trading volumes of put options (bearish bets) to call options (bullish bets). To put it another way, trading volume in put options has been significantly higher than that in calls.

“A put-call ratio above 1 is considered to be an indicator of a selloff while a put-call ratio below 1 is an opportunity to buy,” as per Investopedia.

However, when the ratio gets too high (extreme bearishness), the market is considered to be ready for a reversal higher, and when the ratio is too low, the market is considered close to topping out.

In bitcoin’s case, a reading above 1.7 could be considered too high. In the past, the ratio has breached that level only two times. Further, on both occasions, costs bottomed out on the same day or the following day.

The put-call volume ratio rose to a high of 1.89 on March 12, when the cryptocurrency fell by nearly 40%. Around the following day, prices bottomed out at $3,867.

Similarly, the cryptocurrency bottomed out near $6,500 in mid-December with the put-call ratio rising to levels around 2.00.

As such, the latest reading of 1.79 could be considered an advance warning of an impending bear trap – more so, as the put-call open interest ratio, which measures the number of open put options relative to open call options, recently hit a 14-month low of 0.40.

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