What are my options for a covered call strategy on cryptocurrencies?
September 5, 2021 1:36 PM   Subscribe

As a retail investor, say I wanted to put a small monthly amount (let us say $1k/mo) over a long period of time expecting a 2007-2008 style financial collapse in cryptocurrency. Basically instead of investing long, I'm willing to make lose relatively small bets over a long period of time assuming there will be a crash at some point. Are there any instruments that allow me to do this as a retail investor?

Basically I have no reason to believe that a crash is imminent and I have no reason to believe that cryptocurrency will crash. I see all the hallmarks from a crash: people on the golf course telling me about it, large moves into retail investors along with what I've learned over the years that when you get out of institutional investors and into retail markets tend to look stable and then somewhat randomly it just collapses.

That said as a retail investor I always feel a bit hampered by my ability to really only bet long. Either I get eaten up by fees or the instruments just aren't there, or taxes really encourage investing and not betting on things to collapse.

The answer might simply be you can't really do what I want and I'm willing to accept that. And when you want to know what I mean by "waiting a long time" I am talking about a 10-15 year time frame.
posted by geoff. to Work & Money (8 answers total) 3 users marked this as a favorite
This is a rigged game, there really isn’t a way to con the con-men.

The whole concept of short selling a con implies a balanced market based environment. This isn’t that, it’s a scam.
posted by nickggully at 1:47 PM on September 5, 2021 [3 favorites]

Best answer: The classic way to do this is to buy out-of-the-money puts. Every week you put up your "insurance premium" and if BTC crashes, you collect. Here is a platform that will sell you cash-settled BTC puts.

The problem is that this is not a good strategy in practice for a few reasons.

- BTCUSD's implied volatility is very high. This means that even a far out of the money puts are quite expensive. For instance, a 3mo put at $26k (so it will only pay off if BTC falls ~50% in the next three months) will cost you $1k.
- You have a lot of counterparty risk. What are the chances that BTC totally craters and your counterparty is still there when you exercise? Here is an explanation of the insurance mechanism for the exchange above, which frankly doesn't fill me with confidence (there's an insurance fund of unclear size designed to make traders whole in response to counterparty bankruptcies). This also interacts with the next point, which is...
- Bitcoin exchange regulation is not great. The one I linked to doesn't allow you to buy if you are in the US for instance. This also means that your settlement mechanism might be regulated out of existence between when you buy the option and when you want to exercise.

So as tempting as it is to try to go short BTC, I would just....not.
posted by goingonit at 2:04 PM on September 5, 2021 [9 favorites]

Here are supposedly some more environmentally-friendly crypto options: https://www.leafscore.com/blog/the-9-most-sustainable-cryptocurrencies-for-2021/
posted by Flock of Cynthiabirds at 4:35 PM on September 5, 2021

I think the quote you're looking for is "The market can remain irrational longer than you can remain solvent".

The reason why things are intentionally made hard for casual investors to short is because it's much easier to lose money that way. Like even your description is basically "I'm happy to lose $1k/month for 10-15 years in the hope that at some point in there I'll make a bunch of $" Does that actually seem like a good bet to you, one that would pay off 120-180x to make up for all the months you lose money? It's possible but it seems like a not great bet, even moreso if you consider opportunity cost. I strongly suggest you only bet against consensus if you 1) have really specialized knowledge in the area that makes you think consensus is wrong or 2) you are experienced enough in finance to cover your bases and minimize risk.

Since you're in software, if you have $1k/month to blow on dumb investments, I think you'd be much better off trying to get involved in early stage startups or go in on IPOs or whatever, since at least in theory you do have some specialized knowledge that is applicable there.
posted by inkyz at 4:58 PM on September 5, 2021 [1 favorite]

Best answer: If you are going to do this, you can avoid the counterparty risk - as much as possible - by trading here. This is a "real exchange" - the biggest derivatives exchange in the US - that happens to offer bitcoin products as a vanishingly small part of their overall market. As such the entire bitcoin market could collapse and it wouldn't make any difference in their business.

With that said, this is not an exchange that caters to retail directly. I'm noting it as something that if you really want to get into and you're willing to set up the appropriate accounts with a broker, you could make it work.
posted by true at 7:05 PM on September 5, 2021 [1 favorite]

Response by poster: One thing I'm learning is it actually might make sense to go long on Bitcoin because there's no way in the markets to really hedge against it and the implied vol. is high. It seems that everything is skewed to make it long, there's no pressure on the other side. I don't simply mean there aren't put options but the deregulation seems to skew very high in the favor of investors. Even more so if you're allowed to transact with it without having to pay a capital gains tax on a coffee purchase. Not even getting into whether or not the government would prop it up should the quasi-savings accounts become too large.

It does seem to be an institutional investors game though.
posted by geoff. at 7:36 PM on September 5, 2021

Best answer: It's a traders' game -- the spreads are super wide, there's a ton of volatility, a lot of unsophisticated investors. So the finance people making the most money off of BTC aren't the buy side, they're the market makers.

(I actually didn't realize CME had bitcoin options. This avoids the issues I mentioned other than the volatility, but, unlike futures, there seems to be effectively zero liquidity, so you might have a hard time finding a broker willing to quote you prices on them.)
posted by goingonit at 7:39 PM on September 5, 2021 [2 favorites]

Best answer: Check out LedgerX. It is a regulated exchange that eliminates counter party risk by making it essentially a cash exchange, no margins.

I have traded listed options for 35+ years. I am a former member of the CBOE, the Amex, and the CBT. The dealer spread (bid/ask) is prohibitively wide. If it were me, I would put limit orders in and buy (bid for) puts.

Know that being right on direction is not always profitable. The time decay and the timing of the market move is critical. I would roll out of the near month into say 3 months out whenever your position is in the current month. I would also scale into the position but not sure if $1,000/mo is enough to do that.
posted by AugustWest at 10:36 PM on September 5, 2021 [2 favorites]

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