After months of stagnation and false starts, the crypto market is gaining momentum.

Renewed optimism over the likely approval of a spot US ETF fueled last week’s rally in both bitcoin (BTC) and ether (ETH), kick-starting market volatility once more.

“The markets are constantly fluctuating, influenced largely by the sentiments of investors,” Konstantin Shulga, CEO and co-founder of Finery Markets told Blockworks.

“In recent times, we have observed a squeeze in call options for options sellers, while future indicators are becoming less optimistic as the market adjusts to the sudden rise of bitcoin.”

October was a turbulent month, with bitcoin’s price witnessing a significant 15% drive above $35,000 last week.

With this backdrop, Alex Thorn, Galaxy’s head of firm-wide research, believes more upward momentum could become a likely.

In a post on X, Thorn articulated the possibility of another gamma squeeze for the world’s largest digital asset. A gamma squeeze forces options dealers to adjust spot exposure rapidly, often leading to volatility expansion. In the case of negative gamma, even as the price of bitcoin moves higher, dealers need to buy up bitcoin in large quantities to remain properly hedged.

“When dealers are short gamma and price moves up, or when they are long gamma and price moves down, they need to buy spot to stay delta neutral,” Thorn said.

Should the asset’s price reach the $35,750-$36,000 range, Thorn suggests options dealers would need to purchase an additional $20 million in spot bitcoin for every 1% upward move. 

Although the impact of last week’s options expiries could potentially dampen such explosiveness this time around, Thorn maintains that the scenario is still in play.

In addition to discussing the gamma squeeze, the Galaxy Research head examined a range of derived metrics based on on-chain data. 

Thorn highlighted a widening divergence between the bitcoin supply held by long-term holders and that which has moved within the last 24 hours, indicating a decline in on-chain liquidity. 

The 4-year rolling Z-score, a ratio of market price to realized price, suggests that bitcoin is not overvalued and remains in a structurally sound position, Thorn added.

A sparse cost basis between the current price and the $38,400-$39,100 range was observed by the research head with 83% of bitcoin’s supply having not moved since prices were lower than they are currently.

Divergence of opinion

Not all market observers concur, instead musing that the market would likely experience calmer activity following the excess froth from last week’s move.

“I think a further gamma squeeze higher is unlikely at this stage, Lachlan Feeney, founder and CEO of Labrys told Blockworks.  

“Bitcoin is already trading higher than it typically would at this stage in a bull market. I expect the market to remain relatively subdued for a decent while longer, and don’t expect any significant moves higher any time soon.”

Le Shi, Head of Trading at Auros agreed saying Thorn’s comments while accurate in theory and when looked at independently, posed challenges when viewed in practical terms. 

“There are two crucial contextual factors that could mitigate any potential impact,” Shi said.

The $20 million worth of purchases per 1% would not actually carry significant weight considering the liquidity of bitcoin, Shi noted, taking into account futures open interest and daily turnover.

“Thorn’s comments assume that those who hold long gamma positions do not engage in any hedging in the opposite direction during a rally,” the trading head continued. 

“In reality, some portion of the aforementioned amounts will be offset by long gamma players engaging in hedging activities too.”

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