How To Make Money In The Bitcoin Bubble With Options And Futures
WHAT IS A BUBBLE?
While it seems that most people don’t really understand what Bitcoin is, they certainly understand that some people are making a ton of money from it. This kind of mania hasn’t been seen since the .com bubble around the turn of the century. By most definitions, and according to most experts, Bitcoin is in a bubble, and here are some indicators:
- It has increased in value (relative to USD) over 2,000% in the last year
- There are tons of “spin-offs” that diverge from the underlying currency
- Hype in the media drives “investors” to operate emotionally
- Your mailman doubled his investment last week
While Bitcoin, other cryptocurrencies, and blockchain technology definitely have a future, I’ll leave that for another post. Better yet, check out James Altucher, who is a true expert in the field. I’m merely curious… One of his points that I will bring up, though, is that the current-ish value of the cryptocurrency market is $100 Billion, while the total measure of “stuff” in the world is $150 Trillion. This suggests, if the world moves entirely to cryptos, there is a lot of room for growth.
Like most good answers, this gives us an “it depends” scenario. In the short-term, Bitcoin specifically sure looks like a bubble. It might still go up a ways (at around $17K at the writing of this post), driven further than imaginable by the mania that human psychology demands. But it will likely correct at some point. The strategy below is for a situation like this: I don’t know if it’s going up or going down, but I’m fairly confident that it’s going in one direction or the other, and hard.
HOW TO MAKE MONEY
To ensure that the title to this post isn’t just clickbait, here is a specific way to make money in any bubble that allows certain forms of trading. Like anything, invest at your own risk: Do your own research, know your limits, and develop a long-term investing plan. I believe in investing in assets that generate cash flow and have tangible underlying value. Don’t get me wrong, there is tons of potential value in Bitcoin and other cryptos (and if you want to just dip your toe in investing in digital currencies, follow this aff link), but the below strategy is purely speculative!
Options and Futures trading for Bitcoin just became a thing. Trading them is already pretty saturated, again because of the media, but you go to a site like Deribit and purchase these. Within options trading, there is a strategy called a straddle, which is the equivalent to purchasing a put and a call at the same strike price. This means you’re paying money for the rights to buy and sell at the same price. It only works out if the numbers are right, but let’s look at a simple example below:
Jim purchases a Bitcoin call option with a strike price of $17,000 in 3 days. It costs $500. He also purchases a Bitcoin put option with a strike price of $17,000 in 3 days. It costs $500. His total investment is $1,000. The three possible outcomes (at the end of the options terms) are below:
- Bitcoin stays at the strike price of $17,000. Both options are worthless, because you can just buy for that price on the open market. Jim loses his investment of $1,000.
- The price goes up to at least $18,000. The put option is worthless, but the call option is worth $1,000, because he can buy at his strike of 17 and sell at 18. At 18, he breaks even, and anything above that is profit.
- The price goes down to at most $16,000. The call option is worthless, but the put options is worth $1,000, because he can buy at 16 and sell at his strike of 17. At 16, he breaks even, and anything below it is profit.
This is a strategy that options traders use when they aren’t sure which direction the underlying asset will move in, but they are confident that it is going to move.
SUMMARY
Options allow you to use leverage, because the option in the example above cost $500, whereas if you wanted to just buy bitcoin, a single one would cost $17,000. When there is high volatility, these options can be expensive, making this strategy risky; there needs to be significant movement in the underlying asset to actually make money.
That being said, where is Bitcoin going? Will all currency in the world move to it in the upcoming years? Will there be a correction/pop before then? What about other cryptocurrencies? Is Bitcoin really the one that is solving the right problems?
I won’t pretend to have the answers to these, but the amount of money being thrown at this complicated investment is… fascinating.
EXERCISE
- Do you think this is a bubble?
- What is Bitcoin’s future?
- Long-term, will we move to digital currencies?
Thanks for your attention and input, and I will see you next time!
