Bitcoin is hovering at $34,000, can market makers continue to help rise?

Original Author: Chris Newhouse (@CryptoDeFiGuy)

Original compilation: Joyce, BlockBeats

Editor’s note: Bitcoin has been fluctuating around $34, 000 for nearly a week after standing above 30,000. 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 you can see from the BitVol (Bitcoin Volatility) Index chart, Bitcoin options traders in the market are more concerned about the future volatility of the Bitcoin price and expect greater price volatility.
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Last week, Alex Thorn (@intangiblecoins), head of research at Galaxy Research, pointed out that as the BTC spot price rises, Bitcoin options market makers are increasingly shorting gamma, so in the short term, the price of Bitcoin is prone to rise and it is difficult to fall sharply due to (gamma squeeze).
BlockBeats Note: A gamma is an indicator in options trading that indicates how sensitive an option price is to changes in the price of the underlying asset and how quickly a hedged position needs to be adjusted. Gamma squeeze refers to the phenomenon that market makers or option holders need to continuously buy or sell the underlying asset due to the accumulation of gamma risk in options trading, which in turn pushes up the price of the underlying asset.
Some analysts believe that the “gamma squeeze” could happen again this week. Chris Newhouse (@CryptoDeFiGuy), a risk analyst at crypto investor and market maker AlphaLab Capital, shares his insights. BlockBeats compiles as follows:

After spending some time researching pricing, hedging, trading, and getting into the crypto options space, I thought it would be a good time to ask a few questions as an opportunity to learn to sort out some of the “gamma squeeze” phenomenon that has emerged.

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Preliminary information: I believe that the methodology used by @Amberdata to identify “dealer gamma” from retail options streams is rigorous enough. I’ve been using their charts for years. Note: Dealer Gamma exposure only makes sense if you can safely assume that the DEALER is flagged.

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This is so important because traders are assumed to hedge their potential exposures, and as such, their potential flows can be seen as catalysts for price movements. There are a few things to consider about how to manage delta hedging and gamma exposure.

1. Passive and active ordering

2. Execution, i.e. short-term TWAP/VWAP

3. OTC/bilateral transactions with another counterparty/dealer

4. Determine the funding rate for spot/futures/perpetual contracts

5. Specific hedging parameters, such as the % change in the underlying or the time since the last hedge

6. Market volatility/opinions

No one is going to constantly hedge their increments every second.

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This chart explains that the amount of delta a trader needs to buy for every 1% increase is quite staggering. 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.

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This is not just a single entity, but the sum of the marked gamma exposures, which means that hedging of $X may occur despite different levels; But each trading entity is different in terms of the timing and execution of hedging, as well as the weights they place on certain factors.

There’s not going to be a bunch of traders saying “Hey guys, everybody’s ready to buy our delta hedge for $32”. The staggering of this transparent flow and the difference in hedging parameters means that although we know that some hedging flow will occur, we do not know how or when it will happen.

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Given that last week’s massive upheaval took place mostly in a single day, it’s useless to argue about whether chickens precede eggs. The factors driving this move are varied, and hedging of dealer gamma exposures certainly plays a role.

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However, it is debatable that the “gamma squeeze” could happen again this week. Trader gamma exposures have moved higher, and the subsequent moves in the spot could bring some forced hedging flows again.

But several factors have been having other effects in the last week. Last week’s gamma exposure by traders could have been the spark that set off a powder keg – a powder keg of liquidation, leveraged long demand, and spot chases.

It’s important to recognise that positions in the perpetual futures market (liquidation), natural spot demand, and any potential events (what last week’s DTCC was about) must also exist to see an explosion like a 10% move in a day.

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Thank you @Amberdataio, @volmexfinance @CoinSharesCo, and @glxyresearch for the chart.

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