In a recent one rack Via X (formerly Twitter), Alex Thorn, head of enterprise research at digital asset firm Galaxy, highlighted the potential for another Bitcoin gamma squeeze similar to last week’s. BTC gained 15% last week. He noted: “Last week’s Bitcoin gamma squeeze could happen again. If BTCUSD moves higher to $35,750-36,000, options dealers will have to buy $20 million in spot BTC for every 1% upside move, which could lead to explosiveness if we start to rise to those levels.”
Thorn delved deeper into the mechanisms and explained the behavior of dealers with regard to gamma and delta. “If dealers are short range and the price rises, or if they are long range and the price falls, they need to buy spot to remain delta neutral. Last week’s expirations will dampen the potential explosiveness, but it is still a factor.” This essentially means that the actions of options traders, driven by the need to take a neutral position, can amplify price movements.
Will the Bitcoin price rise like last week?
Thorn also emphasized the importance of on-chain data for understanding these dynamics. He cited a persistent gap between supply from long-term holders and supply that moved in less than 24 hours. This divergence, which has widened over the past year, signals a decline in on-chain liquidity, indicating that long-term holders are not selling their holdings, potentially leading to a supply squeeze.
In addition, Thorn pointed to the four-year rolling Z-score of the ratio between market price and realized price, a variation on the MVRV ratio. This measure provides insight into the valuation of Bitcoin compared to the historical average. A high positive Z-score indicates potential overvaluation, while a negative Z-score may indicate undervaluation. Thorn’s observation that the pattern is starting to resemble the one we saw before previous bull runs is particularly noteworthy.
Another crucial observation by Thorn concerns the compression of relative cost bases. He noted a tightening pattern historically observed during bear or accumulation periods that precede bull markets. This compression suggests that there is consensus among different types of holders about the value of Bitcoin.
Thorn’s analysis of Bitcoin supply by the price at which each coin last moved is particularly illuminating. He noted a thin cost base between the current price of $34,591 and the range of $38,400-39,100. Furthermore, since 83% of the supply hasn’t changed because prices were lower than today and almost 70% of the supply has been stagnant for over a year, it’s clear that long-term holders are making a profit and are likely waiting for even higher prices before selling. .
Last week, as reported by NewsBTC, Thorn had accurately predicted a gamma squeeze. He had highlighted the important role the options market played in influencing Bitcoin’s price trajectory. Thorn warned: “We are approaching maximum pain for gamma shorts.”
In summary, while Thorn does not make a direct prediction about the short-term price of Bitcoin, his analysis of X provides a comprehensive overview of current market dynamics. The combination of potential gamma squeezes, declining on-chain liquidity, and historical patterns all point to a favorable environment for Bitcoin bulls.
At the time of writing, BTC was trading at $34,249.
Featured image from Shutterstock, chart from TradingView.com