Bitcoin closes at $42,000, missing expectations amid crypto regulation and stock market rally

Bitcoin (BTC) bulls followed a devastating retest of the $38,000 support on March 7. Confidence and momentum built earlier this month was abruptly shattered on March 2 after BTC failed to break above $44,500 for the third time this month.

The Bitcoin price increase on March 9 was partly due to this week’s expected U.S. inflation data report. Analysts expect another 40-year high as the consumer price index (CPI) hit a 7.9% annual gain.

Also, U.S. Treasury Secretary Janet Yellen's statement on President Biden's executive order on digital assets was a bit more dovish than expected. Although removed from the U.S. Treasury Department’s website for what appeared to be an early publication by mistake, the order will apparently call for a “coordinated and comprehensive approach to digital asset policy.”

Rising commodities are a harbinger of Bitcoin’s rise

Bitcoin’s recent strength isn’t surprising considering the Bloomberg Commodity Index (BCOM) hit an all-time high of 134 on March 8. Despite the revision to 129, the 30-day cumulative BCOM gain stood at 18.5%, according to MarketWatch.

Bitcoin bulls are betting between $44,000 and $48,000, based on open interest in options expiring on Friday. These levels may look bullish now, but Bitcoin tested this level eight days ago.

Looking at it more broadly, using the call/put ratio, it shows that Bitcoin bulls have a 40% advantage, as a $460 million call (buy) instrument has a bigger stake than a $330 million put (sell) option open positions. However, a 1.40 call/bear indicator is deceptive as most bullish bets will become worthless.

For example, if the price of Bitcoin remained below $43,000 on March 11 at 08:00 UTC, those call (buy) options would only be worth $190 million. This effect occurs because if bitcoin is trading below $44,000, the right to buy bitcoin at that price is worthless.

At $42,000, bulls could make $140 million

Below are the three most likely scenarios based on current price action. The number of March 11 options contracts available for long (call) and short (put) instruments depends on the expiration price. The imbalance in favor of each party constitutes the theoretical profit:

• Between $40,000 and $42,000: 2,600 calls vs. 2,100 puts. The end result is a balance between call (call) and put (put) options.
• Between $42,000 and $43,000: 4,500 calls and 1,150 puts. The net result was $140 million in favor of longs.
• Between $43,000 and $44,000: 5,100 calls vs. 700 puts. The end result was $190 million in favor of a bullish (bull) instrument.

This rough estimate takes into account calls used in bullish bets and puts exclusively for neutral put trades. Even so, this simplistic approach ignores more complex investment strategies.

For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a certain price. Unfortunately, there is no easy way to estimate this effect.

Bears need BTC price below $42,000 to balance

Bitcoin bulls would need to hold $42,000 to make a $140 million profit on March 11. Moreover, a price upside of just 2% from the current $42,200 level would be enough for Bitcoin bulls to pocket a $190 million gain when options expire on Friday.

Given the short-term positive sentiment on inflation expectations and less pressure from regulators, it will be difficult for bears to suppress prices. Currently, options market data is in favor of call (buy) options.