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This Bitcoin options strategy allows early bird traders to prepare for BTC’s next breakout

Crypto traders expecting a price reversal could use this options strategy to get positioned in Bitcoin.

Bitcoin’s price broke below its 55-day resistance at $27,000 on May 12, down 12.3% in 30 days. But more importantly, it decoupled from the S&P 500 Index, which is basically flat from 30 days ago and 15% below its all-time high.

Bitcoin price in USD (right) vs. S&P 500 futures (left), 12-hour. Source: TradingView

As the chart indicates, for some reason, Bitcoin (BTC) investors believe that the favorable macroeconomic trends for risk markets were overshadowed by the increasing risk perception of the cryptocurrency sector.

Financial crisis could fuel Bitcoin’s price increase

For starters, there’s the impending United States government debt ceiling crisis, which, according to U.S. Treasury Secretary Janet Yellen, could cause an “economic and financial catastrophe." The increased risk of default should, in theory, be beneficial for scarce assets, as investors seek shelter from a weaker U.S. dollar.

The $5.6 trillion commercial real estate market in the U.S. is subject to additional risks due to high interest rates and troubled regional banks. Guggenheim Partners chief investment officer Anne Walsh stated, “We’re likely going into a real estate recession, but not across the entire real estate market."

There is also positive news on the cryptocurrency regulatory front, as the industry gathers additional support against the regulatory efforts of the U.S. Securities and Exchange Commission (SEC). The U.S. Chamber of Commerce filed an amicus brief on May 9, defending the Coinbase exchange and accusing the SEC of deliberately creating a precarious and uncertain landscape.

Further fueling investors’ hope is the Bitcoin halving expected for April–May 2024, when the miners’ incentive per block will be reduced from 6.25 BTC to 3.125 BTC. Addresses holding 1 BTC or more reached one million on May 13, according to the Glassnode analytics firm. In total, a whopping 190,000 “whole-coiners” have been added since February 2022.

Despite the recent Bitcoin price weakness, there are enough drivers and potential triggers to sustain a considerable bull run in the upcoming months. Professional traders are aware of the liquidation risks associated with futures contracts, so their preferred investment strategies include options instruments.

How to apply the risk reversal strategy in Bitcoin

Options trading presents opportunities for investors to profit from increased volatility or obtain protection from sharp price drops, and these complex investment strategies, involving more than one instrument, are known as “option structures."

Traders can use the “risk reversal” option strategy to hedge losses from unexpected price swings. The investor benefits from being long on the call option but pays for those by selling the put. Basically, this setup eliminates the risk of the stock trading sideways and comes with limited risk if the asset trades down.

Profit and loss estimate. Source: Deribit Position Builder

The above trade focuses exclusively on June 30 options, but investors will find similar patterns using different maturities. Bitcoin was trading at $27,438 when the pricing took place.

First, the trader needs to buy protection from a downside move by buying 2.3 BTC puts (sell) $22,000 options contracts. Then, the trader will sell 2.0 BTC put (sell) $25,000 options contracts to net the returns above this level. Finally, the trader should buy 3.2 call (buy) $34,000 options contracts for positive price exposure.

Investors are protected down to $25,000

That options structure results in neither a gain nor a loss between $25,000 (down 9%) and $34,000 (up 24%). Thus, the investor is betting that Bitcoin’s price on June 30 at 8:00 am UTC will be above that range while gaining access to unlimited profits and a maximum 0.275 BTC negative return.

If the Bitcoin price rallies toward $37,250 (up 36%), this investment results in a 0.275 BTC gain. Moreover, after a 42% rally to $39,000 within 45 days, net returns are 0.41 BTC. In essence, unlimited gains with a capped loss.

Even though there is no initial cost associated with this options structure, the exchange will require a 0.275 BTC margin deposit to cover the negative exposure.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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SEC calls on firms to disclose exposure to crypto bankruptcies and risks

The Securities and Exchange Commission corporate finance division reminded companies of what they are required to disclose and provided guidance to what else they want to know.

The United States Securities and Exchange Commission (SEC) has issued new guidance that could see publicly traded companies disclose their exposure to crypto assets.

In a statement released on Dec. 8 by SEC’s Division of Corporation Finance, it said the recent upheaval in the crypto asset market has “caused widespread disruption in those markets” and noted that companies may have disclosure obligations under federal securities laws to disclose whether these events could have an impact on their business.

The SEC has also included an example letter that would be addressed to companies asking for additional disclosures about the company’s exposure to crypto bankruptcies, crypto asset volatility, and any other significant crypto market development.

The first question asks the company to provide disclosure of any “significant crypto asset market developments” that could impact the company’s financial condition, results, or share price, including the impact of the price volatility of crypto assets.”

Other questions ask the company to discuss how certain bankruptcies have impacted or may impact the business, including whether one has experienced “excessive redemptions or withdrawals” or to the extent that crypto assets are being used as collateral for loans.

It also asks the company to describe any material risks to the business from regulatory developments relating to crypto assets, or risks faced by the assertion of jurisdiction by U.S. and foreign regulators or other government entities over crypto assets and crypto asset markets

In the accompanying text, the SEC explained that it “selectively reviews filings […] to monitor and enhance compliance with applicable disclosure requirements.”

It noted that companies are already required to supply additional information as needed to avoid misleading it.

Related: BlockFi employees were discouraged from describing risks in internal communications: Report

“In meeting their disclosure obligations, companies should consider the need to address crypto asset market developments in their filings,” the agency added.

The SEC has been gearing up for greater crypto oversight in recent months, opening new offices — an Office of Crypto Assets and an Office of Industrial Applications and Services — specifically for that purpose. The SEC and other agencies have come under fire recently for their lack of enforcement in high-profile cases.

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FTX will be the last giant to fall this cycle: Hedge fund co-founder

This bear market has seen the collapse of Celsius, Three Arrows Capital, Voyager, and now FTX, but the worst is likely over, a hedge fund executive suggests.

While the FTX crisis is continuing to unfold, the former head of risk at Credit Suisse believes the exchange's fall from grace should be the last catastrophic event — at least in this market cycle. 

CK Zheng, the former head of valuation risk at Credit Suisse and now co-founder of crypto hedge fund ZX Squared Capital said that FTX’s fall was part of a “deleveraging process” that began after the COVID-19 pandemic and further accelerated after the fall of Terra Luna Classic (LUNC), formerly Terra (LUNA).

“When LUNA blew up a few months ago, I expected a huge amount of deleveraging process to kick in,” said Zheng, who then speculated that FTX should be last of the “bigger” players to get “cleaned up” during this cycle.

Before its collapse, FTX was the third largest crypto exchange by volume after Binance and Coinbase. 

“I’m sure there are multiple players that will probably get impacted [...] in the following weeks, you know, small, large — but I would say this one in terms of magnitude will be one of the larger ones before the whole cycle really ends.”

On Nov. 14, crypto exchange BlockFi admitted to having “significant exposure” to FTX and its affiliated companies. A day later, a Wall Street Journal report suggested it was preparing for a potential bankruptcy filing.

A number of exchanges have also halted withdrawals and deposits this week, citing exposure to FTX, including crypto lending platform SALT and Japanese crypto exchange Liquid.

On Nov. 16, institutional crypto lender Genesis Global said it would temporarily suspend withdrawals citing 'unprecedented market turmoil.'

The fate of these businesses are yet to be determined.

Zheng noted that moments like this are all normal signs of a lengthy, stressful crypto winter which “basically wipes out many of the weak players.”

On a positive note, however, Zheng said that the FTX collapse is unlikely to shake institutional investor confidence, at least for those investing in blockchain technology and certain cryptocurrencies such as Bitcoin and Ethereum.

“For many of the institutional investors [...] as long as they think about the longer term, they think about how blockchain technology is going to advance in the future to help the financial industry [...] that’s still in place.”

CoinShares’ head of research James Butterfilll in a Nov. 14 note revealed that inflows into cryptocurrency investment products rose sharply last week after institutional investors bought the dip triggered by FTX’s collapse.

Digital asset investment products saw inflows totaling $42 million in the week ending Nov. 13, the largest increase in 14 weeks.

On the other hand, their outlook wasn’t so optimistic for blockchain equities, which registered $32 million in weekly outflows.

Related: Paradigm co-founder feels 'deep regret' investing in SBF and FTX

Zheng said it was “mind-boggling” how much damage an MIT-educated, 30-year-old young person can do to the crypto ecosystem — referring to FTX former CEO Sam Bankman-Fried.

He believes the fall of FTX was the result of a lack of clear rules and regulations governing crypto exchanges. Zheng said it may also have been the result of a top-heavy management structure that may not have had the necessary know-how to run a business of such a size.

“Obviously, they’re smart in one aspect, but they’re running a $32 billion company is very different than, you know, when you manage a small company.”

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