Trading firms scrambling amid bitcoin price surge

Trading desks are springing into action as bitcoin’s price and crypto dominance test levels not seen for the better part of a year.

The price of bitcoin topped $35,000 for the first time since the 2022 Terra stablecoin collapse after BlackRock’s iShares Bitcoin Trust was listed on the DTCC’s website — driving speculation that SEC approval of a spot bitcoin ETF was imminent. The listing was removed earlier today.

According to experts who spoke with Blockworks, in the immediate aftermath of bitcoin’s surge, derivatives buyers are being forced to unwind short positions, possibly contributing to the price spike.

In the longer term, volatility indicators may be showing cooling sentiment from funds betting on bitcoin’s (BTC) price movement.

Options sellers face a squeeze

Spencer Hallarn, global head of OTC trading at GSR, said in a statement shared with Blockworks that price increases driven by speculation on approval for a US spot bitcoin ETF have led to a short squeeze on derivative positions.

After facing margin calls on their “short volatility positions,” option sellers are “buying back sold call options” and thus driving up bitcoin’s price, Hallarn said.

Notably, the derivatives exchange Deribit announced Monday that it would be raising its margin requirements “in light of potential rapid price and volatility movements.” The increased margin will force traders to put up more collateral, in theory protecting against a liquidity crunch.

In a message shared with Blockworks, Luuk Strijers, Deribit’s chief commercial officer, said the platform’s reserves are safe and Deribit has “plenty of margin for all open positions.” A Deribit representative added that the company hasn’t seen its current levels of trading activity since 2021.

Sentiment indicator shows funds reining in expectations

After funds work through call option headaches, analysts are predicting a price reversion.

QCP Capital said in its markets report that risk reversals, an indicator for investor feelings on future volatility where higher figures imply bullishness, reached their highest point in the past year during bitcoin’s climb. The report adds that “derivative markets are implying…that levels are a little stretched here” and the fund is closing out some of its bitcoin exposure.

QCP’s risk reversal chart, shared with Blockworks, shows risk reversal falling to levels consistent with the past few months after its momentary peak.

“You would expect a little retracement even if you assume that we are in a real upturn,” Matteo Greco, research analyst at Fineqia International, said.

Greco cautioned against making too much of indicators like risk reversal without knowing the precise strategy with which funds entered the current upswing.

Get the news in your inbox. Explore Blockworks newsletters:

The Breakdown: Decoding crypto and the markets. Daily.
Empire: Crypto news and analysis to start your day.
Forward Guidance: The intersection of crypto, macro and policy.
0xResearch: Alpha directly in your inbox.
Lightspeed: All things Solana.
The Drop: Apps, games, memes and more.
Supply Shock: Bitcoin, bitcoin, bitcoin.