Bitcoin and Derivatives: Why $4,200 is So Critical

Bitcoin continued to face strong resistance on Wednesday, with upside firmly capped below several technical hurdles that threaten to undermine the latest rally attempt. As Bloomberg recently reported, a growing number of bitcoin traders are turning to derivatives to squeeze some value out of their assets, a trend that could have adverse effects on the currency’s short-term value.

BTC/USD Update

The bitcoin price is currently trading at $3,576 on Bitstamp, where it was virtually unchanged compared to the previous day. Aggregate data courtesy of CoinMarketCap show an average price of $3,628, a value that is skewed to the upside by exchanges like Bitfinex and, where bitcoin trades at a significant premium.

Bitcoin’s technical profile shows strong resistance near the 50-day moving average, which is seen tracking around $3,630. Further north, $4,000 is a psychological barrier that has offered strong headwinds before. Beyond that, the 15-week moving average of $4,200 is the next major resistance test. This area represents the high from late December.

Despite the narrow moves, trade volume has actually picked up in the last 24 hours, with virtual exchanges processing more than $6.5 billion worth of BTC transactions. That’s an increase of more than $300 million from Tuesday’s level.

BitMEX, a popular derivatives platform, has seen its share of the overall volume climb back above double digits. At the time of writing, the derivatives exchange accounted for 12% of the volume. The spot market accounted for the remainder. During the depths of the bear market in November and December, derivatives accounted for roughly a third of bitcoin’s daily trade volumes.

Related: Crypto Rally Loses Steam as Wall Street Reviews the Merits of a Bitcoin ETF.

Turning to Derivatives

Bitcoin traders are flocking to derivatives in ever-growing numbers as a way to bet on a rebound following the dramatic plunge in prices this past year. At the same time, traders betting on a further drop in prices are using derivatives as a way to squeeze out cash from their current holdings.

The market for bitcoin derivatives is actually a lot bigger than initially perceived. In addition to BitMEX and CBOE/CME bitcoin futures, private options markets have grown increasingly popular in the last six months. As Bloomberg reports, volumes for these “private bilateral contracts” could be anywhere between $125 million to $500 million per month.

Covered calls are a popular option for long-term holders who are stuck in crypto winter and want to get out with as much money as possible. They restrict a seller’s ability to benefit from price increases past a certain point, with most of the upside potential going to the buyer.

As Bloomberg notes, a firm by the name of QCP Capital purchased a three-month call option for an amount equivalent to 250 bitcoins (roughly $900,000). The contract’s strike price is $4,200, which is well above the price at which the call option was purchased. If bitcoin stays below $4,200 at expiry, QCP’s counterparty will earn a premium of $66,250 and keep its bitcoins. If bitcoin exceeds $4,200 at expiry, the counterparty will be required to sell all of its bitcoins at that price. In this case, QCP will get the rest of the spoils.

Suffice it to say, $4,200 has emerged as a critical price point for the market as a whole. How bitcoin performs over the next three months could dictate whether the market is headed for new lows or whether a firm bottom has finally been established.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi