Bitcoin price broke below the 55-day resistance of $27,000 on May 12, down 12.3% in 30 days. But more importantly, there was no correlation with the S&P 500 index. The S&P 500 Index has been broadly flat for the past 30 days and is 15% below its all-time high.
For some reason, as the chart shows, Bitcoin (BTC) investors believe that favorable macroeconomic trends for risk markets have been overshadowed by rising risk awareness in the crypto sector.
Financial Crisis Could Drive Bitcoin Price Rise
First and foremost, there is the impending US government debt ceiling crisis, which, according to US Treasury Secretary Janet Yellen, could spell “economic and financial catastrophe.” Increased default risk should theoretically be beneficial for scarce assets. Investors are trying to escape a weak US dollar.
The US’ $5.6 trillion commercial real estate market is under further risk from high interest rates and struggling local banks. “We’re probably going to go into a real estate recession, but that’s not going to happen for the entire real estate market,” said Anne Walsh, chief investment officer at Guggenheim Partners.
There is also good news on the regulatory side of cryptocurrencies as the industry gathers additional support for the U.S. Securities and Exchange Commission (SEC) regulatory efforts. The U.S. Chamber of Commerce filed a court brief on May 9, defending the Coinbase exchange and accusing the SEC of intentionally creating a situation of instability and uncertainty.
Further raising investor expectations is the expected Bitcoin halving in April-May 2024, when the miner incentive per block will drop from 6.25 BTC to 3.125 BTC. become. The number of addresses holding more than 1 BTC reached 1 million on May 13, according to analytics firm Glassnode. Since February 2022, a whopping 190,000 total “hole coiners” have been added.
Despite the recent bitcoin price slump, there are ample drivers and potential incentives to sustain a significant bull market over the next few months. Professional traders are aware of the liquidation risk associated with futures contracts, so their preferred investment strategies include options products.
How to Apply a Risk Reversal Strategy in Bitcoin
Options trading offers an opportunity for investors to profit from rising volatility or be protected against a sharp drop in price. These complex investment strategies involving multiple instruments are known as ‘option structures’.
Traders can use the “risk reversal” option strategy to avoid losses due to unexpected price movements. Investors make money by going long call options, but pay for them by selling puts. Essentially, this setup eliminates the risk of the stock trading sideways and limits the risk of the asset going down.
Although the trade above focuses only on the 30 June option, investors will find similar patterns using different maturities. At the time of pricing, Bitcoin was trading at $27,438.
First, traders need to purchase protection from a downside move by purchasing a put (sell) $22,000 option contract for 2.3 BTC. The trader then sells an option contract at $25,000, he puts 2.0 BTC, purifying profits above this level. Finally, the trader needs to buy his 34,000 options contract for $3.2 call (buy) dollars to gain positive price exposure.
Investors are protected up to $25,000
This option structure produces no profit or loss between $25,000 (down 9%) and $34,000 (up 24%). Therefore, investors are betting that the Bitcoin price on June 30th at 08:00 UTC will be above that range, with unlimited profits and negative returns of up to 0.275 BTC.
If the Bitcoin price rises towards $37,250 (up 36%), this investment will yield a profit of 0.275 BTC. Moreover, the net profit is 0.41 BTC after a 42% rise to $39,000 within 45 days. Essentially, there is a cap on loss and unlimited profit.
There are no initial costs associated with this option structure, but the exchange requires a margin deposit of 0.275 BTC to cover negative exposure.
This article does not contain investment advice or recommendations. Any investment or trading move involves risk and readers should conduct their own research before making any decision.
This article is for general informational purposes and is not intended, nor should it be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views or opinions of Cointelegraph.
