Sirwin
Sirwin

A simple way to make money when values of cryptos go down


Cryptos are volatile assets. Sometimes they go up, but some times they go down. When they go up it is easy to make money by buying cryptos and watching how their values increase. When they go down values of cryptos portfolios also go down. Passive incomes from declining in value cryptos also go down. A simple way to make money in such situations is to buy undervalued put options on crypto exchanges.

 

A put option on a cryptocurrency, for example bitcoin, is a contract which gives to a buyer a right to sell a specified amount of this cryptocurrency at a specified date, called an expiration date, at a specified price, called an exercise (or strike) price. A price of this contract is called a premium of the put option.

 

At the expiration date, an owner of a put option receives a profit equal to a difference between the exercise price and the price of the cryptocurrency on the expiration date, if the exercise price is higher than the cryptocurrency price at expiration date.

 

An owner of a put option can also sell the option on crypto exchanges. If the selling price will be higher than the buying price then the owner will have a profit equal to a difference in the prices minus transaction costs.

 

Put options on cryptos have interesting property. They have negative correlations with values of the cryptos. This means that when cryptos go down in values, the put options on these cryptos go up in values. Therefore, in cases when crypto values go down we can buy put options at low prices, wait until they increase in values and realize capital gains at expiration dates or earlier by selling the options at profit.

 

A simple way to look at put options is to consider them as insurance polices against risks that prices will go down. The most important risks are: risks of temporary declines and a risk of a crash (fast decline with long term recovery period or no recovery at all). In the first case, a holder of cryptos will suffer decline in income from passive investments, but will not loose her/his investments. In the second case the holder of cryptos may loose the income for a long time or in the worst case loose not only income but the investments. Put options protect investors in cryptos from such risks in the same way as home insurances protects home owners from risks that the homes will be destroyed or damaged. Undervalued options are similar to cheapest insurance policies. That is why they give the highest returns on investments in addition to providing insurance of risks and reducing stress for investors.

 

When there are many negative news, statements, decisions on cryptos from government officials we should expect a temporary decline in cryptos (see [1-2]). Therefore, if we buy undervalued put options before cryptos decline and sell these put options later when the cryptos go down (and values of the put options go up), we receive some profit.

 

To find undervalued put options we need to estimate values of these options using a probabilistic forecast.

 

Let us consider several examples.

 

Multiple announcements by Government officials about inflation and future rate hikes resulted in expert opinions about temporarily decline in cryptos.

 

Example 1 (waiting till an expiration date)

 

On February 15, 2022 bitcoin price was around $44,000. At that time Ms. X believed that the price will go down to $40,000 with probability 0.6 or will go up to $44,500 with probability 0.4 till February 18.

 

By entering the data into input fields of the option price calculator

(see https://www.ispreport.xyz/utools/ocalc/ocalc.html) and clicking on the “Calculate” button

i1

Ms. X found that a premium on a put option with a strike price of $42,000 should be about $328.

o1

Market participants on Binance.com priced this option at $241.79 (see below on the right side), therefore this option was undervalued by the market participants, according to Ms. X believes.

p1

 

On February 15, 2022, Ms. X bought 10 put options on the bitcoin index with the exercise price $42,000 and the exercise date: February 18, 2022 on Binance.com. Ms. X paid 2,417.9 for these options.

 

On February 18, 2022, these options expired with an expiration price of $39,950. Ms. X received 10*(42,000-39,950)=$20,500. After subtracting the initial cost ($2,417.9) and transaction fees (0.5%), Ms. X had profit of $17,979. This is 743% profit in 3 days.

 

 

Example 2 (selling before an expiration date)

 

On February 15, 2022, bitcoin price was around $44,000. At that time Mr. Y believed that the price will go down to $27,000 with probability 0.65 or will go up to $44,500 with probability 0.35 till April 29.

 

By entering the data into input fields of the option price calculator

i2

Mr. Y found that a premium on a put option with a strike price of $35,000 should be about $1,939.39.

o2

Market participants on Binance.com priced this option at $1,449.87 (see below on the right side), therefore this option was undervalued by the market participants, according to Mr. Y believes.

p2

On February 15, 2022, Mr. Y bought 2 put options on the bitcoin index with the exercise price $35,000 and the exercise date: April 29, 2022 on Binance.com. Mr. Y paid $2,899.74 for these options.

 

After multiple countries announced sanctions on Russia, Mr. Y decided to sell his options in an anticipation that values of cryptos will go up (not down as was expected initially) as a result of this sanctions.

 

On February 27, 2022, market participants were buying such options for $2,724.36.

p3

Mr. Y sold the two options for 2*$2,724.36= $5,448.72. After subtracting the initial cost ($2,899.74) and transaction fees (0.1%), Mr. Y had profit of $2,543.53. This is 87.71% profit in less than two weeks.

 

Conclusions:

 

1. For owners of crypto portfolios this method allows to insure declines in passive income streams, when crypto values go down.

 

2. For those, who interested to maximize profits from movements in cryptos, this method allows to make money on crypto, when their values go down. In example 1, Ms. X was able to make 743% profit in 3 days; in example 2, Mr. Y was able to make 87.71% profit, even in a case where unexpected events affected his expectations about price movements.

 

3. Buying undervalued put options in the best insurance for crypto investors against a crash or long term decline in cryptos.

 

 

P.S. 1. The examples are not real, they are hypothetical examples for educational purposes, only.

 

2. The option price calculator is not free, you need to buy a license to use it.

 

3. This strategy works only when values of cryptos go down as was expected. It does not work in bull or frozen markets. It may not work in volatile markets, if your guesses about movements of cryptos are incorrect.

 

4. Using options on cryptos is a very risky business. Those who can not tolerate risks, should use strategies with zero or low market risk, for example friendly arbitrage (see [3]), which guaranty positive gains regardless of an outcome in the future, has zero market risk and infinite return on investment.

 

 

In the next post we consider a simple solution to cryptos mass adaptation problem.

 

 

References

 

 

[1] Influence of Good and Bad News on Cryptocurrency Prices

 

https://medium.com/cindx/influence-of-bad-and-good-news-on-cryptocurrency-prices-f42ff4b89fa5

 

 

[2] Bitcoin's Largest Price Changes Coincide With Major News Events About the Cryptocurrency

 

https://www.aier.org/article/bitcoins-largest-price-changes-coincide-with-major-news-events-about-the-cryptocurrency/

 

 

[3] Friendly arbitrage

 

https://www.publish0x.com/simple-solutions-to-complex-problems/a-simple-way-to-make-money-by-means-of-friendly-arbitrage-xvyxvyy

How do you rate this article?

17


I_g_o_r
I_g_o_r

I am curious about science, technologies and their applications to solving real problems.


Simple solutions to complex problems
Simple solutions to complex problems

Each post is devoted to a simple solution to a complex problem.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.