Bitcoin's $90,000 Approach Triggers Market Maker Hedging

The Bitcoin market is experiencing heightened activity as the price of BTC approaches the $90,000 mark. This price level is significant because it is where market makers, who provide liquidity to the order book, are currently "short gamma." This means that as the price of Bitcoin moves closer to $90,000, market makers will need to sell when the spot price drops and buy when it rises to maintain a market-neutral position. These hedging activities could add to market volatility.

Market makers, also known as dealers or MMs, are responsible for providing liquidity to the order book. They occupy the opposite side of investors' trades and work to maintain a market-neutral exposure by hedging in spot and futures markets. They make money off the difference between what they pay for an asset and how much they sell it for, known as the bid-ask spread. According to Deribit bitcoin options data tracked by Amberdata, market makers are "short gamma" at the $90,000 strike. This means that as the bitcoin price moves closer to that level, market makers will need to sell when the spot price drops and buy when it rises to keep a market-neutral position. These hedging activities could add to market volatility.

Gamma represents the rate of change in delta, which itself measures the sensitivity of an option's price to changes in the underlying asset's price. Holding short gamma means holding a short position in options, which can lead to financial loss, especially during periods of high volatility. So when market makers are short gamma, they must trade in the market's direction to maintain a market-neutral book. The opposite is the case when market makers are long gamma. Toward the end of last year, market makers were long gamma at $90,000 and $100,000, which led to consolidation between these levels.

In other words, the hedging behavior of dealers could add to market swings at around $90,000. According to Ardern, the dealer gamma profile of BTC following Friday's expiration will look similar to the gold-backed PAXG token. "After removing the impact of options about to be settled, PAXG has a similar GEX distribution to BTC. The price gets support after a significant price decline and encounters resistance when it rises significantly, that is, a wide range of fluctuations," Ardern said.

Despite the positive regulatory developments, the market has been rattled by large-scale BTC movements linked to the defunct exchange Mt. Gox. On March 25, Mt. Gox transferred 11,501.4 BTC worth approximately $1 billion across two wallets. Earlier in March, the exchange moved 12,000 BTC when Bitcoin was trading at $92,000, leading to a nearly 7% price correction. These movements have added to the market uncertainty, reflecting a tug-of-war between institutional adoption and selling pressure from traders.

Analysts suggest that the Bitcoin price may see a correction, potentially adjusting towards the $70,000 - $75,000 range. However, the current price action remains volatile, with Bitcoin trading at $86,523.60, down 0.5% in the past 24 hours, but still above the 20-day exponential moving average (EMA) at $85,629. The Relative Strength Index (RSI) stands at 50.26, hovering near neutral territory, suggesting neither overbought nor oversold conditions. Bollinger Bands (BB) show BTC consolidating within the middle range, with upper and lower bands at $89,439 and $79,236, respectively. A break above $89,439 could signal a bullish reversal, while a drop below $79,236 may indicate a deeper correction.

The structural developments in the regulatory landscape and the potential for Bitcoin to serve multiple purposes in investor portfolios could further drive its price upwards. These developments could help BTC act both as a traditional finance hedge and as part of a growth allocation, potentially making it the next member of the Magnificent 7. However, the market remains cautious, with traders keeping a close eye on the RSI structure that could hint at a major breakout. The daily RSI retesting Nov '24 downtrend, along with the current price action, suggests that Bitcoin is poised for a significant move in the near future.