Bitcoin's Price Under Pressure: Are Covered Calls the Culprit?

Bitcoin's price action has been a topic of much discussion among analysts and investors alike. While the recent launch of spot Bitcoin ETFs initially fueled optimism, the cryptocurrency has struggled to maintain significant upward momentum. One prominent theory gaining traction points to the use of covered call strategies by early Bitcoin adopters, often referred to as "Bitcoin OGs," as a primary factor suppressing price.

A covered call strategy involves holding an existing Bitcoin position and selling call options against it. This allows the holder to generate income from the premiums paid by option buyers. In essence, the Bitcoin holder agrees to sell their Bitcoin at a predetermined price (the strike price) if the option is exercised. While this strategy can be profitable in a stable or slightly rising market, it inherently caps the potential upside for the Bitcoin holder.

According to some analysts, the widespread adoption of covered call strategies by Bitcoin OGs is creating significant selling pressure, particularly as Bitcoin's price approaches the strike prices of these options. As the price rises, these holders may hedge their positions by selling Bitcoin, effectively limiting price surges and creating resistance levels. This dynamic can prevent Bitcoin from experiencing the kind of parabolic rallies that have characterized its past.

"Despite traditional ETF investors willing to pay premiums to go long, Bitcoin natives selling covered calls have put a damper on a price rally". The strategy can reduce annualized volatility. Since 2023, the covered calls strategy has reduced annualized volatility by 75%.

The impact of covered calls extends beyond just price suppression. It also influences market dynamics. By capping potential gains, covered calls can moderate price multipliers, affecting investor behavior and overall market trends. The increasing institutional adoption of covered calls, with over 5% of institutional assets allocated to Bitcoin, has further amplified these effects.

However, other factors could be contributing to Bitcoin's price suppression, including structural market manipulation through spot-futures schemes, institutional short-position exploitation, and derivative-driven volatility. Academic studies suggest that some institutional players inflate spot prices while shorting perpetual futures contracts, leading to price drops and eroding retail investor trust.

Furthermore, some analysts suggest that the transfer of Bitcoin from long-term holders to institutional investors is a key factor in the current market. As OGs take profits, the resulting sell-side pressure can create resistance and limit upward price movement.

While the covered call strategy offers a way for long-term holders to generate income and manage risk, its widespread use may be inadvertently shaping Bitcoin's price trajectory. As the market evolves and new players enter the space, understanding these dynamics is crucial for navigating the complexities of the Bitcoin market.