Bitcoin options traders are skittish.

They have been loading up heavily on downside protection at levels not seen in five years, according to VanEck’s latest Bitcoin ChainCheck report.

Last month, the put-to-call ratio — a gauge of bearish versus bullish bets — peaked at 0.84 and averaged 0.77. That’s the highest level since June 2021, and is among the 9% most bearish periods since mid-2019. Bitcoin options open interest is at around $33 billion.

Translation: investors are buying way more protection against Bitcoin falling than they are betting on the asset rising.

Puts function as insurance against price drops, giving investors the right to sell Bitcoin at a specific price even if it crashes below that level. Calls, by contrast, give investors the right to buy Bitcoin at a fixed price even if the asset rallies above it.

And unlike retail investors who mostly buy and sell spot Bitcoin, options markets are dominated by institutional players who use derivatives to bet whether an asset is going to rise or fall. So when a put-to-call ratio rises to extreme levels like 0.84, it signals that professional investors are paying premium prices for downside protection rather than betting on a true recovery.

VanEck’s analysis comes just as Bitcoin gets rattled amid another escalation of force in the war between Iran, Israel and the US. The top crypto dropped to around $69,000 during the evening hours of March 18.

Extreme defensiveness

When put-to-call ratios are high, they signal two possible scenarios.

The first scenario is that peak fear tends to mark the bottom. When everyone is positioned for more downside, it can signal capitulation.

Take the last time the ratio hit last month’s levels. In June 2021, right after China had banned Bitcoin mining. Bitcoin crashed to $30,000 from $64,000. Just a few months later, it bottomed near $29,000 before rising again to $60,000 in November.

Then there’s a second scenario: institutions see what’s coming. When investors are willing to pay elevated premiums for puts — and VanEck noted that this premium has reached record levels — it suggests they expect more pain ahead.

Meanwhile, today’s levels sit in the 91st percentile historically. That means in 91% of periods since mid-2019, options traders were less bearish than they are right now.

Piling into puts

There’s another particularly striking situation that’s playing out.

Even as options traders keep piling into puts, other sectors of the markets are cooling down, noted VanEck.

Futures funding rates — essentially the cost of borrowing money to bet on Bitcoin rising — dropped, while realised volatility fell, and the spot market has also stabilised some.

It’s one thing for retail investors to panic during a crash. But it’s another thing entirely for institutional options traders to maintain extreme defensiveness even as volatility drops and prices stabilise.

Either they are all wrong and are about to get caught flat-footed by a Bitcoin rally, or they’re seeing something in the macro environment — which could range from an escalation of the conflict in the Middle East, some sort of regulatory risk, or concerns around liquidity — that justifies paying historically high premiums for protection against another crash.