Bitcoin hovers at $34,000, can market makers continue to fuel the rally?
Original author: Chris Newhouse (@CryptoDeFiGuy）
Original compilation: Joyce, BlockBeats
Editors note: In the past week, the price of Bitcoin has been fluctuating around US$34,000 after standing above 30,000 US dollars. After the adjustment, whether the price of Bitcoin can continue to rise in one go, the information in the market is not very clear. As can be seen from the BitVol (Bitcoin Volatility) Index chart, Bitcoin options traders in the market are more concerned about the future volatility of Bitcoin prices and expect greater price fluctuations.
Last week, Galaxy Research head of research Alex Thorn (@intangiblecoins) analysis pointed out that as the spot price of BTC rises, more and more Bitcoin option market makers are shorting gamma. Therefore, in the short term, due to (gamma squeeze), the price of Bitcoin is easy to rise but difficult to fall significantly.
BlockBeats Note: Gamma is an indicator in options trading, indicating the sensitivity of option prices to changes in the underlying asset price, and also measures the speed at which hedging positions need to be adjusted. Gamma squeeze refers to the phenomenon that due to the accumulation of gamma risk in options trading, market makers or option holders need to continuously buy or sell the underlying asset, thereby pushing up the price of the underlying asset.
Some analysts believe a gamma squeeze could happen again this week. Chris Newhouse, risk analyst at crypto investment institution and market maker AlphaLab Capital (@CryptoDeFiGuy) shared his insights. BlockBeats is compiled as follows:
After spending some time researching pricing, hedging, trading, and getting into the crypto options world, I thought it was a good time to ask a few questions as an opportunity to learn to sort out a few things about the “gamma squeeze” phenomenon that has emerged.
Preliminary information: I believe the methodology used by @Amberdata to identify dealer gamma from retail options flow is rigorous enough. Ive been using their charts for years. NOTE: Dealer Gamma exposure only makes sense if you can safely assume that DEALER is flagged.
The reason this is important is because traders are assumed to hedge their potential exposure, and therefore their potential flows can be viewed as a catalyst for price movement. There are several things to consider about how to manage delta hedging and gamma exposure.
1) Passive and active order placement
2) Execution, that is, short-term TWAP/VWAP
3) OTC/bilateral transactions with another counterparty/dealer
4) Determine the funding rate of spot/futures/perpetual contracts
5) Specific hedging parameters, such as underlying % change or time since last hedging
6) Market fluctuations/opinions
No one is constantly hedging their increments every second.
This chart explains the staggering amount of delta traders need to buy for every 1% move up. It is a good way to provide a visual number for the risk that needs to be hedged, and it also helps to visualize the increase in gamma risk.
This is not just a single entity, but the sum of the tagged gamma exposures, meaning that although hedging of $X may occur at different levels; each trading entity differs in the timing and execution of the hedging, And the weight they place on certain factors is also different.
Theres not a bunch of traders saying Hey guys, everyones going to buy our delta hedge at $32. This difference in staggering and hedging parameters for transparent flows means that although we know some hedging flows will occur, we do not know how or when it will occur.
Theres no use debating whether the chicken came before the egg, given that last weeks massive moves mostly took place in a single day. There are a variety of factors driving this move, and hedging of traders gamma exposure certainly plays a role.
However, it is arguable that a gamma squeeze could happen again this week. Dealer gamma exposure has moved higher, and subsequent moves in spot may again bring some forced hedging flows.
But several factors were at play last week. Trader gamma exposure last week may have been the spark that set off the powder keg of liquidations, leveraged long demand and spot chasing.
Its important to realize that positions in the perpetual futures market (liquidation), natural spot demand, and any potential events (DTCC content from last week) must also exist to see something as explosive as a 10% move in a day.
Thanks@Amberdataio，@volmexfinance @CoinSharesCo,and@glxyresearchChart provided.
