Could Bitcoin Fall? 🪙

🐺 Hi pack-mates,

This is Howling Markets, the only economic forecast that won’t disappoint you before the new year even starts!

Today we will be covering:

• Education: What Are Options Contracts? 💲

• Hawkish News From the ECB 🌎

• Investors Loading Up on Bitcoin Puts 🪙

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What Are Option Contracts?

Option contracts are financial derivatives that more experienced traders and investors use to either generate profits or to hedge their positions.

The term financial derivative refers to the fact that the price of these instruments mainly varies based on the price of an underlying asset, which in the case of options can either be a commodity, a stock, an ETF or many other assets.

On a very basic level, option contracts are agreements between two parties, to buy or sell a certain amount of the underlying asset, at a given price, before or at maturity.

To be slightly more specific, there are two types of options: calls and puts. Call options give the buyer the right to buy the underlying at the so called “strike price”, whereas put options give the buyer the right to sell the asset at the strike price.

The strike price is simply the price at which the buyer wants to exercise their right. Regardless of the underlying price movement, the strike price is always constant, and it is fixed when the agreement is created.

Usually, option contracts are reserved for more experienced traders and investors because, being financial derivatives, their prices are extremely volatile.

If for example the price of a stock can be influenced by many things such as financial data, news and so on, the price of a stock option is influenced by all of this factors plus the volatility of the stock, the time until the expiration of the contract, the strike price, the interest rates and much more.

However, these interesting and complex financial instruments are extremely useful as they can be used to hedge our portfolio against potential drawbacks. After the next news, we will see how some Bitcoin traders are doing just that!

Hawkish News From the ECB

We have discussed multiple times how Europe and the United States are currently moving on two parallel planes both characterized by a high level of uncertainty.

As a matter of fact, even if the US seemed to move towards easier financial conditions, the Minutes were released just in time to tame expectations.

Today, Luis de Guindos, vice-president of the ECB, has sustained an interview in Madrid to allegedly stop expectations from turning overly optimistic. In this interview he talked about how soft indicators pointed at an economic contraction in December 2023 and at an above-target inflation rate for the initial part of 2024.

Despite his comments, the consensus still expects that the 2% inflation target will be reached within 2024 in the Eurozone, however now many analysts believe that the first rate cut will not be announced during the March meeting anymore.

Today’s Howling Question

And now, it is time for our howling question!

Among all the chaos and optimism in the cryptocurrency market, Ethereum is in a strange spot. It is currently under no spotlight, but there are some rumors that have been pushing its price around.

This week has been particularly volatile for ETH, do you know by how much the price has changed between Monday and Wednesday?

a) -12%

b)  -6%

c) -1%

d) +8%

e)  +13%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Could Bitcoin Fall?

The cryptocurrency market has rallied non-stop since the end of October thanks to the continues flow of great news coming from the US. First, the chance that the Bitcoin’s Spot ETFs will be approved in January, then the Feds announcing easing financial conditions in 2024.

According to Polymarket, investors are currently forecasting a 98% probability that Bitcoin Spot ETFs will be approved before the 15^th of January. For the more inexperienced traders, such a probability might signify a great buying opportunity, as it is almost certain that the ETFs will be approved, and the price might skyrocket.

However, everyone in the markets wants to gain an edge and because of this, prices move based on future expectations rather than current facts. If almost everyone expects that the ETFs will be approved, such an event is already priced in the market and if this event occurs, the price is not likely to jump much.

However, if the decision about the ETFs is either negative or pushed forward, the price might drop quite significantly. Additionally, the markets might also be full of traders who wanted to profit from the speculation on the approval, just to get out right after it occurs.

Because of this, it is much more likely that the price will drop rather than surge, and many traders have started to take action by buying put options on Bitcoin.

As a reminder, a Bitcoin put option grants the right to sell one Bitcoin at the predetermined strike price before expiration. So, a trader owning both a Bitcoin and a Bitcoin put option has a neutral stance, meaning a portfolio whose value will not change regardless of the changes in Bitcoin’s price.

Buying a put option is like buying an insurance policy, should they really be concerned, or do you believe that Bitcoin will be just fine?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

On Wednesday, the stock prices continued to push higher, only stopping 3 points lower than the top reached at the end of December before coming back down and closing the day with a long wick up. Nevertheless, the day closed green at a +0.57%.

However, aside from the long wick up and the RSI divergence, another sign of might be starting to form. The VIX divergence occurs when the stock price and the VIX move in the same direction, and it often is a strong sign of reversal.

The VIX is the volatility index of the S&P500, and it goes up when volatility increases and prices go down, while it goes down when SPX’s price goes up. From VIX’s chart we can see how its price could have entered an uptrend since the second half of December, potentially pointing towards an SPX reversal.

However, for now this indicator is still relatively weak and it would need a strong rejection from the support trendline to be validated.

Additionally, the US government bond yields are continuing to trend higher. After retesting the same support zone of the past few days, it continued to move higher, closing the day up +0.37%.

Answer

The correct answer is e) +13%

So far, this week has been particularly great for ETH! All the news about Bitcoin’s spot ETFs have started some rumors about the potential release of Ethereum’s in 2024! Do you think that this could happen, or that it mainly is just a market rumor?

Howl-Worthy Memes 😂

🐺 See you next time!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

Want to get your product or job listing for business-related readers? Please email us.