Bitcoin Drops Below $28K as Options Expire, Traders Borrow WBTC From Aave

Bitcoin (BTC) traded under pressure on Friday as options worth billions of dollars expired and some traders took bearish bets on the cryptocurrency's Ethereum-based wrapped version, WBTC.

The leading cryptocurrency by market value slipped by 1% to $27,546 during European hours having failed to keep gains above $29,000 on Thursday, CoinDesk data show. At 08:00 UTC, Deribit, the world's largest crypto options exchange by trading volumes and open interest, settled bitcoin options worth over $4 billion.

"The current price drop is more likely to be the impact of delivery and settlements and market makers selling their spot and contracts to maintain a delta neutral [market-neutral] book," Griffin Ardern, a volatility trader from crypto asset management firm Blofin told CoinDesk.

Market makers provide liquidity by creating buy and sell orders, and earn money through the bid-ask spread while maintaining a direction-neutral exposure. They are always on the opposite side of investors and often trade the underlying cryptocurrency in the spot market or buy or sell perpetual futures to balance their bullish/bearish exposure in the options market.

Circumstantial evidence validates Ardern's argument: Bitcoin dropped to $27,546 from $28,100 in the hour before 08:00 UTC. Deribit settled quarterly contracts at 08:00 UTC.

The chart tweeted by pseudonymous analyst @52kskew shows the cumulative volume delta (CVD) in the Deribit-based perpetual futures market fell sharply into the negative before the settlement time. A positive and rising CVD means more buyers are in action, while a negative CVD implies sellers are aggressive.

$BTC Deribit market data
Deribit CVD & Delta showing the price impact of option expiry.

Typically occurs when large options open interest is near expiry & books need to be balanced out (delta neutral or hedged) https://t.co/J8M1NFgcti pic.twitter.com/0m7o9OQns9

— Skew Δ (@52kskew) March 31, 2023

Borrowed short?

The sale of borrowed WBTC, or shorting, may have played a supporting role in driving prices lower. WBTC is the largest wrapped version of bitcoin on Ethereum, the largest smart contract blockchain, and can be swapped on a 1:1 basis for BTC.

The number of WBTC borrowed from the dominant decentralized lending protocol Aave rose to 3,220 BTC, a 29% increase in two weeks, according to data tracked by Swiss-based blockchain analytics firm Santiment.

Traders often express their bearish view on bitcoin by shorting WBTC tokens borrowed from DeFi platforms like Aave.

"Currently, we are seeing cautious borrowing of WBTC at this price range, nothing too insane yet, but it looks like folks have started to short," Santiment said in a market update.

The recent peaks in total WBTC borrowed from Aave have marked price bottoms in bitcoin.

"Seems like the shorters on AAVE have a nice track record of being blown up. So far, the highest spikes in total borrowed WBTC saw them marked the local bottoms," Santiment noted.