Bitcoin price broke below the 55-day resistance at $27,000 on May 12, down 12.3% in 30 days. But more importantly, it broke away from the S&P 500, which is basically flat from the past 30 days and 15% below its all-time high.
As the chart indicates, for some reason, Bitcoin (BTC) investors believe that macroeconomic trends favorable to risk markets have been overshadowed by the growing awareness of risk in the cryptocurrency sector.
The financial crisis could fuel a bitcoin price increase
For starters, there is the impending US government debt ceiling crisis, which, according to US Treasury Secretary Janet Yellen, could spell “economic and financial catastrophe.” Investors seek shelter from a weak US dollar.
The $5.6 trillion US commercial real estate market is subject to additional risks due to high interest rates and troubled regional banks. Anne Walsh, chief investment officer of Guggenheim Partners, stated, “It is possible that we are entering a real estate recession, but not the entire real estate market.”
There is also positive news on the cryptocurrency regulatory front, as the industry gathers additional support against the US Securities and Exchange Commission (SEC) regulatory efforts. The US Chamber of Commerce filed a friendly memorandum on May 9, defending the Coinbase exchange and accusing the Securities and Exchange Commission (SEC) of creating a risky and uncertain landscape.
Further fueling investor hope is the expectation of the Bitcoin halving in April-May 2024, when the incentive for miners per block will be lowered from 6.25 BTC to 3.125 BTC. Addresses holding 1 BTC or more reached 1 million on May 13, according to analytics firm Glassnode. In total, 190,000 “tokens” have been added since February 2022.
Despite the recent Bitcoin price weakness, there are enough potential drivers and catalysts to sustain a significant bull run in the coming months. Professional traders understand the liquidation risks associated with futures contracts, so their preferred investment strategies include options instruments.
How to apply risk reversal strategy in bitcoin
Options trading provides opportunities for investors to take advantage of increased volatility or gain protection from sharp drops in price. These complex investment strategies, involving more than one instrument, are known as “option structures”.
Traders can use the “risk reversal” option strategy to hedge losses from unexpected price fluctuations. The investor benefits from being long the call option but pays those off by selling the call option. Essentially, this setup removes the risk of trading the stock sideways and comes with limited risk if the asset trades down.
The above trade focuses exclusively on June 30 options, but investors will find similar patterns using different maturities. Bitcoin was trading at $27,438 when pricing took place.
First, the trader needs to buy protection from the downward movement by buying 2.3 BTC and placing (selling) $22,000 worth of options. Then, the trader would sell 2.0 BTC and put (sell) $25,000 options contracts for net returns above that level. Finally, the trader must buy 3.2 call options (buy) $34,000 in order to gain positive price exposure.
Investors are protected up to $25,000
This options structure results in neither profit nor loss between $25,000 (down 9%) and $34,000 (up 24%). Thus, the investor bets that the price of Bitcoin on June 30 at 8:00 AM UTC will be above this range with access to unlimited profits and a maximum negative return of 0.275 BTC.
If the price of Bitcoin rises towards $37,250 (up 36%), this investment yields a profit of 0.275 BTC. Moreover, after a 42% surge to $39,000 within 45 days, the net return is 0.41 BTC. In essence, unlimited gain with limited loss.
Although there is no upfront cost associated with this options structure, the exchange will require a margin deposit of 0.275 BTC to cover the negative exposure.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
This article is for general information purposes and is not intended and should not be considered legal or investment advice. The views, ideas and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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