QuickTake:

• Heightened Volatility Expected: Bitcoin derivatives market is set for increased volatility due to the approaching “quadruple witching.”
• Significant In-the-Money Open Interest: Over 20% of open interest on Deribit is in-the-money, worth over $2.7 billion.
• Large Notional Size: Total notional size of Friday’s options expiry exceeds $10 billion.
• Market Sentiment: Short-term bearish sentiment but potential positive shift anticipated by mid-July.

As the quarterly options expiry approaches this Friday, the bitcoin derivatives market is poised for heightened volatility, driven by the phenomenon known as “quadruple witching.” This event, occurring four times a year, involves the simultaneous expiry of contracts for index futures, index options, options, and futures, often leading to increased trading volume and market volatility.

Several analysts have indicated that a significant portion of the open interest on Deribit, the leading bitcoin options exchange, is currently in-the-money (ITM). According to Deribit CEO Luuk Strijers, over 20% of the open interest, valued at more than $2.7 billion, is set to expire ITM. The total notional size of Friday’s options expiry exceeds $10 billion, underscoring the scale of potential trading activity.

“As we approach Friday’s large quarterly expiry, potentially influenced by ‘quadruple witching’ and related volatility in U.S. markets, over 20% of Deribit open interest is set to expire in-the-money, equating to over $2.7 billion,” Strijers told The Block. This significant ITM open interest suggests there could be substantial trading volume as these contracts near expiration.

Quadruple witching, a term familiar to traditional financial markets, typically results in a flurry of trading activity and heightened volatility. This is because many traders and institutions adjust their positions or hedge against potential price movements, leading to an uptick in market activity. In the context of the bitcoin derivatives market, the impact of quadruple witching can be particularly pronounced given the market’s inherent volatility and the speculative nature of many of its participants.

Strijers also highlighted the current market sentiment, noting a short-term bearish trend evident in the distribution of bitcoin open interest. Despite this, he suggested that traders anticipate a positive shift for bitcoin by mid-July, as indicated by options skew. This optimism is grounded in the expectation that, while the immediate sentiment may be bearish, the underlying fundamentals and longer-term outlook for bitcoin remain strong.

Adding to the market dynamics, Bitnomial Exchange President Michael Dunn noted that many market participants have opted to roll their June futures contracts to July. This strategy allows traders to maintain open interest without letting contracts expire, thus capitalizing on elevated prices further out on the curve. “This could indicate that traders are still continuing to take advantage of elevated prices farther out on the curve to lock in the basis,” Dunn told The Block. Typically, traders wind down these positions when the opportunity to capture higher future prices declines.

At the time of writing, bitcoin was trading around $60,972, having declined by 2% in the past 24 hours, according to The Block’s price page. Ether, another major cryptocurrency, saw a price decrease of 1.2% to $3,342 during the same period. The overall cryptocurrency market cap stood at $2.36 trillion, marking a 1.1% decline in the last 24 hours, based on data from Coingecko.

The lead-up to this Friday’s expiry is being closely watched by market participants. The large volume of ITM options set to expire could trigger significant market movements, especially if major players decide to adjust their positions en masse. For retail traders and smaller investors, this period can be particularly challenging as the increased volatility may result in rapid and unexpected price swings.

The potential for heightened volatility is not limited to bitcoin. As seen with the price movements of ether and the overall cryptocurrency market, the ripple effects of such events often impact a wide range of digital assets. Consequently, traders and investors need to remain vigilant and consider both the immediate and longer-term implications of the approaching options expiry.

Looking ahead, the outcome of this week’s expiry could provide valuable insights into market sentiment and future price trends. If traders’ expectations of a positive shift by mid-July materialize, it could signal a renewed bullish phase for bitcoin and other cryptocurrencies. However, if the bearish sentiment persists, it might lead to further consolidation or even a potential downturn in the market.

In conclusion, the impending quarterly options expiry on Friday, coupled with the phenomenon of quadruple witching, sets the stage for a period of heightened volatility in the bitcoin derivatives market. With over $2.7 billion in ITM open interest on Deribit and a total notional size exceeding $10 billion, market participants should brace for substantial trading activity. As traders navigate this turbulent period, the evolving market sentiment and strategic positioning will play a crucial role in shaping the immediate and longer-term trajectory of bitcoin and the broader cryptocurrency landscape.