bitcoin plummeted earlier this month to nearly $60,000, wiping out huge amounts of value across the crypto market and vaporizing some trading funds.
Most observers attributed the decline to macroeconomic forces, including the capitulation of spot ETF holders (and possible rumors that the funds would unload their positions). Yet another, quieter force that normally keeps trading running smoothly likely played a role in the spot price drop.
That force is the market makers, or brokers, who continually post buy and sell orders to the order book when you trade, maintaining strong liquidity so that trades proceed smoothly, without significant delays or price jumps. They are always on the opposite end of trades from investors and make money on the bid-ask spread, the small gap between the purchase (bid) price and the sell (ask) price of an asset, without betting on whether prices will rise or fall.
They hedge their exposure to price volatility by buying and selling real assets (such as bitcoin) or related derivatives. And sometimes these hedging activities end up accelerating the movement in progress.
That’s what happened between February 4 and 7, when bitcoin fell from $77,000 to almost $60,000, according to Markus Thielen, founder of 10x Research.
This episode shows that the bitcoin options market is increasingly swinging its spot price, mirroring traditional markets where market makers quietly amplify volatility.
According to Thielen, options market makers were in a “short range” between $60,000 and $75,000, meaning they were short bags of options (calls or puts) at these levels without sufficient hedges or protective bets. This left them vulnerable to price volatility around these levels.
When Bitcoin fell below $75,000, these market makers sold BTC in the spot or futures markets to rebalance their hedges and remain price neutral, injecting additional selling pressure into the market.
“The presence of approximately $1.5 billion in negative gamma options between $75,000 and $60,000 played a critical role in accelerating Bitcoin’s decline and helps explain why the market rebounded sharply once the large final gamma pool near $60,000 activated and absorbed,” Thielen said in a note to clients on Friday.
“Negative gamma means that options dealers, who are typically counterparties to investors who buy options, are forced to hedge in the same direction as the underlying price movement. In this case, when Bitcoin fell to the $60,000 to $75,000 range, dealers became increasingly short gamma, forcing them to sell bitcoin as prices fell to remain hedged,” he explained.
In other words, hedging by market makers established a self-feeding cycle of falling prices, forcing traders to sell more, which pushed prices down further.
Note that market makers’ coverage is not always bearish. At the end of 2023, there were also short options above $36,000. When the Bitcoin spot price broke above that level, they bought BTC to rebalance, triggering a quick rally above $40,000.
