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Why options should be considered for investing in Bitcoin

Montréal Exchange
April 5, 2022
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Why options should be considered for investing in Bitcoin

Many cryptocurrency investors have bought Bitcoin and other altcoins under the assumption it will be held in their portfolio for many decades. The assumption for these “hodlers” is that the future of financial transactions will see Bay Street and Wall Street banks replaced with decentralized systems.

For other investors, this thesis may not necessarily hold true and they are merely bullish on Bitcoin and are looking to profit off near-term moves. Since they aren’t interested in the longer-term prospects, opening an account with a crypto exchange and learning the differences between hot and cold wallets isn’t on their to-do list.

Fortunately, the surge in popularity in Bitcoin has resulted in stock exchanges offering investors exposure to the digital currency via exchange traded funds, or ETFs. This means that investors can indirectly gain exposure to the price movement of Bitcoin in their registered and non-registered broker accounts.

Should you buy options on a Bitcoin ETF?

A Bitcoin ETF is no different than any other ETF that trades on a stock exchange. The financial product is designed to provide stock investors with exposure to the price movement of Bitcoin. If the price of Bitcoin gains 3% in one day, investors can reasonably assume the ETF will offer an identical return.

As a reminder, buying options gives the holder the right (but not the obligation) to buy or sell a stock or ETF at an agreed upon price within a given timeframe. Options also represent a cheaper alternative compared to buying the asset outright, especially if it is very expensive.

Bitcoin entered 2022 trading north of $40,000US which means the average investor may not be able to afford to buy one Bitcoin. The same concept holds true for expensive stocks, such as Shopify that blew past the $500 level in 2020 and traded as high as $1,762.92 in 2022.

Suppose Bitcoin dipped to $35,000US a coin and an investor is bullish on its ability to rebound back to the $40,000US support level by the end of next month. The price gain on Bitcoin implies a 14% appreciation so the investor will need to buy a call option on a Bitcoin ETF with a strike price that implies a similar 14% gain.

Instead of investing tens of thousands of dollars into Bitcoin, the investor found a cheaper method of potentially profiting from Bitcoin’s gains via options on an ETF.

Also important to note is that buying options on a Bitcoin ETF can be a method to hedge against potential downside. Bitcoin and other cryptocurrencies have shown a tendency of extreme volatility in both directions. Fortunately, buying put options can hedge against a position losing value.

Consider again an investor who owns one Bitcoin and believes that sentiment is shifting from bullish to bearish. The investor believes that Bitcoin could lose 15% of its value within a month and they would like to profit from this scenario.

Instead of adding to their position, an investor can buy a put option on a Bitcoin stock with a strike price set 15% below where the stock is trading at. If the investor’s thesis is correct, a correction in Bitcoin’s price will result in the value of the put option gaining. This near-term win can be used to offset some or all of the losses the investor faces in their original Bitcoin position.

Conclusion

The high price of Bitcoin is one of the reasons why investors stick to the sidelines. But trading Bitcoin via a derivatives market like options offers retail investors an opportunity to profit off the price fluctuations without having to own the digital coin outright.

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

 

Disclaimer:

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

Copyright © 2022 Bourse de Montréal Inc. All rights reserved. Do not copy, distribute, sell or modify this document without Bourse de Montréal Inc.’s prior written consent. This information is provided for information purposes only. The views, opinions and advice provided in this article reflect those of the individual author. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this publication, and we are not responsible for any errors or omissions in or your use of, or reliance on, the information. This publication is not intended to provide legal, accounting, tax, investment, financial, or other advice and should not be relied upon for such advice. The information provided is not an invitation to purchase securities listed on Montreal Exchange, Toronto Stock Exchange, and/or TSX Venture Exchange. TMX Group and its affiliated companies do not endorse or recommend any securities referenced in this publication. Montréal Exchange and MX are the trademarks of Bourse de Montréal Inc. TMX, the TMX design, The Future is Yours to See., and Voir le futur. Réaliser l’avenir. are the trademarks of TSX Inc. and are used under license.

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