The Bitcoin market continues to show little activity, with yield-seeking investors potentially contributing to the stagnation.

Yield-seeking investors appear to have impacted market dynamics in a way that restricts price fluctuations.

Yield seeking has inadvertently restricted BTC price fluctuations. (Austin Distel/Unsplash)

Key points:

• Bitcoin has remained within a narrow range around $70,000 since mid-February.
• Institutional investors have been engaging in the sale of covered call options on their bitcoin assets to enhance yield, transferring substantial gamma exposure to market makers.
• The hedging activities of market makers concerning this positive gamma seem to have mechanically reduced price volatility and led to a decline in bitcoin volatility indices.

The bitcoin BTC$67,408.23 market has been stagnant for more than a month, with yield-chasing investors possibly playing a role.

Since mid-February, BTC has fluctuated within a range focused around $70,000. Some analysts suggest that opposing forces are influencing this scenario. The demand for a safe haven due to the Iran conflict has been providing support to BTC near $65,000, while increasing U.S. Treasury yields have been limiting significant advances beyond $75,000.

Another element seems to have been subtly keeping bitcoin confined within this range, linked to investors utilizing call options to secure extra yield in addition to their spot market positions.

"During Q1, institutional players have been consistently overwriting calls at elevated strikes to capture premiums in a sideways market. This activity has shifted considerable gamma exposure to dealers, who have been hedging by purchasing on dips and selling on rallies to maintain delta neutrality," stated James Harris, CEO of Tesseract, a MiCA-licensed, multi-strategy digital asset management firm.

Options are derivative agreements that grant the holder the right to buy or sell the underlying asset, in this case, BTC, at a predetermined price on a future date. A call option provides the right to purchase and signifies a bullish market expectation. A put option offers a safeguard against declines in BTC pricing.

Consider it akin to securing a concert ticket today for a nominal fee. You can acquire it later at the agreed price, even if the ticket price increases, or transfer your reservation to another person for a profit. Meanwhile, the ticket seller retains the nominal fee.

This is essentially what traders have been executing—they have taken on the role of ticket sellers. By selling call options, they gather premiums (the fee) while providing coverage for the call buyer against potential BTC price increases. They do this against their existing bitcoin assets. This strategy is known as the covered call strategy, a method for generating additional yield alongside spot holdings.

You might be curious about how this relates to bitcoin’s range-bound behavior. The answer lies in the fact that traders have been shorting, or selling, these calls to market makers – the entities that assume the opposite side of these option transactions.

By offloading these calls, traders have placed market makers in a position referred to as positive gamma, which effectively compels market makers to purchase BTC as prices decline and sell BTC as prices rise to remain hedged. The outcome? A price action that remains within a confined range.

In summary, the yield-seeking behavior of investors has been indirectly affecting market inflows in ways that constrain price volatility.

This also clarifies the decrease in the bitcoin 30-day implied volatility index, BVIV, which contrasts with increases in similar indices related to equities, bonds, and oil. The BVIV has fallen by 5% to 56% this month.

"The effect has been a mechanical mitigation of realized volatility — the DVOL index has contracted by approximately six points this week despite the overarching macro conditions," Harris remarked.