- Bitcoin‘s recent decline from $77,000 to near $60,000 in early February was accelerated by complex hedging activities by market makers, known as options dealers.
- Dealers were in a “short gamma” position, forcing them to sell Bitcoin in the spot market as the price fell to hedge their risk, creating a self-feeding cycle.
- This dynamic added significant selling pressure, but the market rebounded sharply after absorbing a large gamma cluster near the $60,000 price level.
Bitcoin’s sharp plunge early this month was supercharged not just by ETF investors, but by the invisible mechanics of the options market. According to Markus Thielen of 10x Research, options market makers were forced into disruptive hedging as the price fell. Their actions created a feedback loop that deepened the sell-off.
Market makers facilitate trades by always being ready to buy or sell, profiting from the bid-ask spread without betting on price direction. However, they must hedge their exposure to price swings using assets like bitcoin or derivatives. When these hedges are unbalanced, they can amplify market movements.
Between February 4 and 7, dealers held a significant “short gamma” position between $60,000 and $75,000. This meant they were exposed to volatility at these levels with insufficient protective bets. Consequently, as bitcoin fell below $75,000, they had to sell BTC to rebalance their books.
Thielen estimates approximately $1.5 billion in negative options gamma existed in that range. “Negative gamma means that options dealers… are forced to hedge in the same direction as the underlying price move,” he explained. This required them to sell bitcoin as prices declined, injecting extra selling pressure.
That hedging activity established a self-feeding cycle where falling prices forced more dealer sales, pushing prices even lower. Conversely, a similar dynamic fueled rallies in late 2023 when price rises forced dealers to buy. The episode underscores how the growing crypto-options market now significantly sways spot prices, mirroring traditional finance.
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