Are you prepared for the upcoming Bitcoin (BTC) halvening? Learn more about how you can not only protect, but also boost your crypto portfolio with options.
First things first, what is bitcoin halvening?
Bitcoin halvening is an event which halves the rate in which new Bitcoins are produced once every four years.
You don’t have to worry about BTC running out anytime soon though! To keep inflation under control, the bitcoin protocol was programmed with a limited supply of 21 million, with new bitcoins gradually entering the system as an incentive for network processors (aka miners).
Similar to the increased difficulty of gold mining overtime, the rate at which bitcoins are created is reduced by half every four years.
Bull or bear? Upcoming halvening in May 2020
The next BTC halvening is expected to happen in a few months time in May 2020. Just like in previous halvenings, this has led to differing opinions about the price direction with the potential massive price fluctuations and “supply shock” to be expected.
As one of the most flexible derivative instruments, options will enable you to manage, boost or protect your crypto positions ahead of the halvening.
Here are 3 ways you can do so:
1. Turn your halvening bets into profit
Are you bullish or bearish about the halvening? You can buy options to make use of a directional view.
Why buy options instead of longing/shorting?
With options, you get the rights to trade BTC volatility with a small upfront cost (Premium Payable) without needing to commit full capital.
Here’s a scenario if you are bullish on BTC for the halvening.
BTC/USD price at start: $7,000
BTC/USD price at end: $9,000
Instead of holding 1 BTC you bought at $7,000 and essentially longing the market with your entire collateral, you can buy a call option for $1,000 to control the movement of 1 BTC.
If BTC price spiked to $9,000, you will get a 100% return from your call option, as compared to 28.5% return from longing your BTC at market.
Buying options is a great way of achieving leverage, while limiting your risk to the Premium Payable.
Of course, there are never guaranteed returns. As an options buyer, you risk the entire amount of the Premium Payable.
However, since options require less capital than equivalent long and short positions, your potential losses will be capped.
2. Protect your crypto portfolio from potential halvening REKT
Afraid that your portfolio will be affected by the price volatility with the halvening? You can insure your crypto assets with options.
Just like how Bitmain gave out put options to miner buyers to ease their concerns about BTC price volatility, you can also buy put options to protect your crypto assets.
For example, if you hold 1 BTC you bought at $7,000 and is afraid of the halvening price volatility, you can buy a put option priced at $200 to protect your position against a possible crash.
If BTC nosedived, your maximum loss will be capped at $200. Here’s how it works.
If BTC dipped to $6,000 on Settlement Date, you will lose $1,000 value from your BTC. However, your put option will have an intrinsic value of $1,000 and can be sold for that amount thus offsetting potential losses and limiting your loss to your Premium Payable.
3. Think the halvening will be a non-event? Make your crypto assets work for you anyway.
If you don’t know where BTC will be heading with the halvening, you still shouldn’t miss out on the price action and make your assets work for you!
Don’t just HODL. If you think movements will mainly be one-sided, sideways or range bound, you can sell options to earn income from the premium received and monetize your assets.
Here’s a scenario.
If you hold 1 BTC at $7,000 and is neutral or slightly bearish on BTC and do not expect it to trade above $8,000, you can sell a call for 1 BTC and receive a premium of $200 that is yours to keep.
If the price of BTC falls to $6,500, the premium will offset some of the loss. If the price of BTC rises to $7,500, the premium will boost your profit beyond $500.
You can treat the premium as income or use it to buy (free!) protection for your portfolio.
Be prepared for the halvening
Why limit yourself to longing, shorting or hodling BTC to bet on the halvening? Try out these smarter ways you can bet on BTC halvening using options.
Source: Sparrow Exchange Blog