Market makers' short gamma exposure above $36,000 could trigger a rapid increase in Bitcoin's price
Recent data from options market makers suggests that Bitcoin could experience significant price gains once it surpasses the $36,000 mark. The demand for higher strike price call options has increased as Bitcoin has rallied in recent weeks, leaving market makers with a net short gamma exposure above $36,000. This exposure could lead to a "gamma squeeze" and accelerate the rally, potentially causing explosive price movements.
A gamma squeeze occurs when the price of an underlying asset, in this case, Bitcoin, increases rapidly due to high demand for options. As the price of Bitcoin increases, market makers who have sold call options have to buy more Bitcoin to hedge their positions. This buying pressure can lead to a rapid increase in Bitcoin's price, creating a "squeeze".
Market makers will need to buy $20 million in spot Bitcoin for every 1% upside move if BTCUSD reaches $35,750-$36,000. This positioning contrasts with earlier this year when market makers were net long gamma, contributing to a volatility lull in the market. Being net long gamma means that market makers benefit from price stability and are incentivized to keep prices stable. However, the current net short gamma position suggests that market makers will have to buy more Bitcoin as the price rises, potentially leading to a gamma squeeze.
For Bitcoin investors, this could mean a period of rapid price gains once Bitcoin surpasses the $36,000 mark. However, it's important to remember that while a gamma squeeze can lead to rapid price increases, it can also lead to increased volatility and potential price corrections once the squeeze ends. Therefore, investors should be prepared for potential price swings and ensure they have a risk management strategy in place.