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The cryptocurrency market is going through a phase where price movements could become more difficult to anticipate. Behind the fluctuations of Bitcoin and Ether, market makers’ hedging strategies play an important role. According to Greeks.Live data, their exposure to options currently presents a configuration likely to accentuate movements in both directions. This situation particularly concerns the derivatives markets and could trigger chain reactions during upcoming fluctuations.

In Brief

  • Bitcoin and Ether show negative gamma exposure across a large part of their trading zones.
  • Market makers could amplify declines by selling and rallies by buying.
  • Leveraged positions risk forced liquidations during sharp moves.
  • A return of positive gamma above $73,000 could change Bitcoin’s market dynamics.

Negative Gamma Exposure Weakens the Bitcoin Market

Data published by Greeks.Live shows negative gamma exposure across a large part of Bitcoin’s current trading zone. This configuration also concerns Ether, which has a comparable structure in its options market. For BTC, the largest concentrations appear around $68,000 and $70,000. These levels represent particularly sensitive zones for brokers’ hedging operations.

Gamma exposure, also called GEX, measures the net gamma associated with market makers’ positions. This indicator helps understand how their hedging operations can influence price variations. A positive exposure means operators generally hold a long gamma position. In this situation, their adjustments usually tend to limit movements and stabilize prices.

Conversely, a negative exposure produces a different dynamic in financial markets. Market makers must sell when prices decline and buy when they rise. These operations therefore follow the initial movement, instead of offsetting it. As a result, this configuration can accentuate Bitcoin’s fluctuations and make sessions more unstable.

Why Hedging Strategies Can Amplify Movements

Market makers occupy an important place in the workings of options markets. They generally take the opposite position to that of investors buying or selling these contracts. Their compensation notably comes from the spread between bid and ask prices. However, they must also regularly adjust their positions to limit exposure to asset price changes.

Options give investors the right to buy or sell an asset at a fixed price. Calls allow profiting from price increases, while puts offer exposure to declines. When traders seek more protection against a drop or anticipate a rise, market makers can accumulate negative exposure. They then have to adjust their hedges based on observed movements.

Adam, a macroeconomic analyst at Greeks.Live, confirmed this situation to CoinDesk. According to him, both Bitcoin and Ether operate in a deep negative gamma zone. He explains that operators must then intervene in the direction of the market to protect their positions. Thus, a decline can lead to further selling, while a rise can cause additional purchases.

Price Levels Concentrating Risks on Derivatives

The Bitcoin chart by Greeks.Live helps better understand this exposure. On Saturday, at 12:37 UTC, the price was around $67,191. At this time, negative gamma covered an area roughly between $58,000 and $72,000. The largest concentrations remained situated around the $68,000 and $70,000 thresholds.

This configuration could increase selling pressure if prices continue to decline. Brokers’ hedging operations could then accompany the drop rather than slow its progression. However, this exposure does not automatically mean the market will continue to fall. Buyers can always intervene and support prices at lower levels.

The phenomenon also concerns perpetual futures contracts, which have no expiration date. These instruments allow investors to take leveraged positions. Adam warns that even a limited downward move could trigger forced liquidations. Platforms then close losing positions, which can add new sales to existing pressure.

A Gamma Reversal Could Change Bitcoin Price Dynamics

The mechanism also works in the opposite direction when prices rise. An increase can force market makers to buy more assets or futures contracts. These additional purchases may then strengthen the initial movement. This dynamic concerns both Ether and Bitcoin, since both markets currently display similar characteristics.

However, the Greeks.Live chart identifies an important threshold for BTC. Its gamma exposure could become positive again above approximately $73,000. This level corresponds to an area where hedging strategies would gradually change behavior. Operators could then sell during rallies and buy during pullbacks.

This change could reduce the amplifier effect of hedges on daily variations. Meanwhile, Adam believes markets remain exposed to sharp movements. He mentions notably fragile order books and larger intraday wicks. These conditions can make price movements particularly sensitive to operators’ reactions on derivatives products.

As long as both cryptocurrencies have not regained their respective gamma reversal thresholds, this fragility could persist. For Bitcoin, the return above $73,000 therefore represents a level to watch. The evolution of brokers’ exposure will allow measuring a possible change in dynamics. Until then, hedging operations could continue to accentuate both bullish and bearish movements.

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Journaliste et rédacteur web passionné par l’univers des cryptomonnaies et des technologies Web3. J’y traite les dernières tendances et actualités afin de proposer un contenu de haute qualité à un large public du secteur.

The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.