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How To Use Bitcoin Halving Volatility Using BTC Options

April 27, 2020

Many investors believe that a significant price change is imminent while the next halving of Bitcoin (BTC) is less than 15 days away. Despite its proven and incredible long-term potential, no one knows exactly how Bitcoin’s price will react during and after the third halving.

Fortunately, the market has matured so far this time that traders can now use winning strategies on both sides of Bitcoin’s price action. Derivatives markets are a relatively new addition to the crypto market and have developed so far in the past two years that investors can use more complex investment techniques.

Halving volatility offers lucrative opportunities

Historically, volatility has risen before and after halving Bitcoin. Volatility measures the strength of daily price fluctuations. The calculation generally includes periods of 30, 60 and 365 days to analyze historical data.

How To Use Bitcoin Halving Volatility Using BTC OptionsHow To Use Bitcoin Halving Volatility Using BTC Options

If you skip the lengthy mathematical definition, you can conclude that assets such as bitcoin and oil are much more volatile than the euro, the Swiss franc or real estate investment funds.

    Bitcoin volatility for 30 days, 2016

Bitcoin volatility for 30 days, 2016. Source: BuyBitcoinWorldWide

Bitcoin’s volatility generally increases near halving, an event that occurs every four years and reduces the issuance of new BTCs for each mined block. In the graph above, notice how the maximum 30-day volatility corresponds to the halving of 2016 on July 9.

This increase in volatility occurs because there is considerable uncertainty about halving. Despite its positive effects, there is no constant demand from Bitcoin buyers. For this reason, the reduction in supply caused by halving does not lead to an immediate result.

Halving the reward for mining BTC could increase volatility

Some miners will shut down the machines due to falling subsidies. Even those with low energy costs could be forced to turn off older devices like the Antminer S9 due to their lower energy efficiency.

This decrease in computing power to protect the Bitcoin network is the main reason for this uncertainty. Currently, there is concern about a death spiral that is forcing large miners to sell their reserves and even bankrupting the most leveraged.

Although it is not rational, this unrest caused by the fall of the hashrate ultimately affects the price. This also leads to an abundance of articles claiming the network is less secure and exposed to 51% of the attacks.

The sudden drop in bitcoin’s hash rate after the March price drop caused Genesis Mining’s Chief Operations Officer to lead more mining sales activity, leading to a potential “capitulation cycle for miners”.

How option traders take advantage of volatility peaks

Contrary to popular belief, the derivatives market is not just about players and levers. Trading in derivatives is nothing new for institutional investors, although the volume of options in bitcoin trading has gained momentum.

According to CNBC, the notorious hedge fund manager Bill Ackman recently benefited from more than $ 2 billion by using options to hedge his portfolio exposure. This strategy does not mean that Ackmans Pershing Square is betting on falling markets, but that it has been used as insurance to cover existing positions as possible setbacks.

Options trading offers investors who want to benefit from increased volatility, protection from sharp falls or maximize profits a whole new range of options if the price stays within a certain range.

These complex operations with more than one instrument are called structures. Most use different option contracts and sometimes involve holding BTC or future contracts.

Bitcoin's current 60-day volatility

Bitcoin’s current 60-day volatility. Source: BuyBitcoinWorldWide

The fall in prices on Black Thursday led to an increase in volatility, especially when we look at a shorter period of 30 days. Even analyzing a 60-day range, you can see that daily price fluctuations have been at their highest in six years.

Volatility in Bitcoin prices in February and March

Volatility in Bitcoin prices in February and March. Source:

The past two months have escaped the norm, even for those accustomed to the volatile fluctuations in cryptocurrency prices. Please note that the drop in Bitcoin prices also occurred with SP 500, oil and treasures.

The volatility of almost all dominant asset classes has recently peaked since 2008. Bitcoin volatility is likely to decrease before halving, though it will remain well above average.

Benefit from bullish and bearish movements

For those unfamiliar with options trading, Cointelegraph has recently published an article detailing the process, including the benefits of futures trading. Instead of benefiting from the additional volatility, leverage traders are typically liquidated or violently canceled more often than those who trade options.

Call and operator options explained

Explanation of call and placement options. Source: Napkin financing

To benefit from large unexpected price fluctuations, you can buy both a call and a put option. So if Bitcoin’s price goes up, the buyer will discard the put option. The opposite is the case if the price falls below the option price. This strategy is called “long straddle”.

The problem with this strategy is the high cost of buying both options, especially for highly volatile assets like Bitcoin. Below is the price for both options with an expiry date of May 29, 2020.

Call Options Market, expires May 29

Call options market expires on May 29. Source: Deribit

For this privilege or right to be able to buy Bitcoin for $ 7,000 on May 29, you must pay $ 797 for each bitcoin. Think of this value as insurance and protection if the cryptocurrency rises above that value. Follow the table below to understand the gain or loss at each level:

Theoretical return for a call option buyer

Theoretical return for a call option buyer

In the example above, you can make a profit of more than $ 7,797 when due. Remember that it is possible to sell the option to another person halfway through. The more Bitcoin rises, the greater the profit from this sale.

Let’s simulate the return of buying a put, a right to sell Bitcoin at a fixed price in the future:

Theoretical return for a put option buyer

Theoretical return for a put option buyer. Source: Deribit

Note that this time, the buyer of the put option will benefit when the bitcoin price drops, unlike the call option. The premium paid for this privilege is $ 679. In this case, the investor benefits if the price is less than $ 6,321 when due.

Theoretical return for call and put options with

Theoretical return for call and put options with “Long Straddle”. Source: Deribit

Buying call and put options with a $ 7,000 strike for May 29 totaled $ 1,476. This amount corresponds to 20.5% of a Bitcoin at the current price of $ 7,150. To make a profit, the price must rise or fall by more than 20.5% before May 29.

This is not an investment recommendation. The theoretical examples are only intended to show the wide range of strategies that can be benefited from trading options. Institutional investors have been using these instruments to take advantage of volatility for years, as have Bitcoin investors.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every step of investment and trading involves risks. You need to do your own research to make a decision.

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