Bitcoin‘s nearly nine-month decline has even HODLers shivering.
Despite the severity of the decline to date, some of the most reliable technical indicators remain clearly short, particularly the Exponential Moving Average (EMA), Weighted Moving Average (WMA), MACD, and Directional Moving Index (DMI).
History is a stark reminder of how deep the crypto winter can be. Before the current cycle, the five worst drawdowns in Bitcoin history were far more brutal. Four of them exceeded 80%. If a similar capitulation were to occur today, a retracement of that magnitude would pull the digital asset back towards the $22,000 area.
Bitcoin since the beginning of the year
This weakness does not occur in isolation. Broad inflation hedges and commodity complexes are experiencing parallel failures. Precious metals like gold and silver have recently fallen below their long-term moving averages. Among base metals, copper has managed to hold its ground so far, while aluminum has just fallen below its 200-day moving average.
Selling completely short Bitcoin or any high-beta crypto asset after a selloff comes with huge tail risk. Perhaps this year’s crypto winter won’t be as harsh as previous winters, and even if it is, a vicious bear market rally could ultimately wipe out short positions overnight. Instead, you can look to the approach one of our top-performing option income funds has successfully implemented over the past year. Microstrategy (MSTR) Earn a rich premium.
Individual investors are iShares Bitcoin Trust (IBIT) or the aforementioned Strategy Inc. (MSTR). By selling an out-of-the-money upside call spread, you can establish a bearish slope while strictly limiting your maximum loss.
My following trades are for strategy.
Let’s explore this structured risk-reward layout using a typical weekly options chain and see how the mathematical advantage favors the seller.
trade
A 1:1 payoff ratio may not seem appealing at first, but it is an out-of-the-money spread. Consider that the underlying stock can only do three things before expiration.
Both options become worthless once they expire. You will retain a credit for the full amount of $1.50. I won’t do anything. The price remains below the short sale strike price. Keep the full $1.50 credit. It goes even higher: 1) To realize a maximum loss of $1.50, the price would have to rise well over $90 at expiration to capture the full width of the $3.00 spread minus the $1.50 premium taken. 2) Nude shorts carry unlimited risks. This is not the case.
Momentum is still clearly negative, but trying to time the exact bottom or pushing short at the low is a dangerous game. It’s perfectly fine to remain short at this point, but be clear about the risks and have time on your side. Until the crypto market (and by extension, Strategy Inc.) stabilizes, we will collect income using risk-defined credit call spreads.
