Report highlights

What's next for Bitcoin with the next halving on the horizon? In this week's Excell with Options, Rich Excell breaks down what he sees in the Bitcoin marketplace as it moves towards the estimated halving around April 19. He shows what has happened with past halving events, how the Bitcoin market has changed with the addition of ETFs and current technicals for how the market may be positioned for the event.

Topic 1: Bitcoin halving dates

There has been a lot of news with bitcoin this year. The ETF news, while well-expected, has been a major catalyst. A 70% move higher on a year-to-date basis would have anyone talking about the asset. However, as we get into April, perhaps the biggest news in the Bitcoin market will be the Bitcoin halving expected on April 19. You can see from the chart above how the reward to bitcoin miners has been halved about every four years in practice. In reality, it occurs every time 210,000 blocks are added to the chain. This regulated decrease in the supply of bitcoin, as the rewards the miners earn for validating the block becomes the new supply of bitcoin in the market, is one of the principal reasons many like to own bitcoin in the first place particularly with the supply of fiat currency not regulated and certainly not dwindling.

Image 1: Long-term chart of bitcoin with vertical lines at each halving

While the Bitcoin halving events are certainly well-known, they have also been seen as catalysts for a move higher in the past. On the one hand, one can say that a reduction in supply for a given amount of demand should lead to higher prices. However, efficient market practitioners might suggest otherwise, wondering how the price would not fully reflect that well ahead of the event. If I look back through time, using a logarithmic chart, I can see that post each halving, there has been a large move though the moves have gotten smaller and lasted not as long. After the first halving, the price moved from $12.35, where it was at the event, to $964 a year later, a 7700% move in a year. At the second halving in July of 2016, the price was $663 at the time of the halving and moved to $2,500 a year later for a 277% move. At the third halving in May 2020, there was more volatility, going from $8,500 to a high of $65,000 about eight months later before settling in around $37,000 a year later, still a return of over 300%. While there are only a few data points, and this is not a statistically significant sample size, there is still the expectation that the reduction in supply will have a similar positive impact on price.

Image 2: Assets under management of Bitcoin ETFs

Perhaps a reason for the expectation of higher prices is that it is not only the supply that is changing but also the demand. As I mentioned earlier, the changing regulation of bitcoin has opened the possibility of Bitcoin ETFs, creating a potential new source of demand from investors who were not already involved in the market. In the chart above, I can see that the assets under management in Bitcoin ETFs is now up to $55 billion. While this number has stabilized somewhat in the past month or so, it has been a major driver of higher prices. The potential combination of strong demand and less supply has some thinking that the move in bitcoin post the halving could actually be larger than we have seen in the past couple of cycles.

Image 3: Changes in Bitcoin options and futures open interest at CME Group

Of course, it is not just the ETFs that are drivers, I care about futures and options on Bitcoin, too. In the top chart, you can see the growing demand for Bitcoin futures as open interest in the product is now close to $12 billion. In the table at the bottom, I can see the average daily volume (ADV) and average open interest (OI) for Bitcoin futures, but I would also like to draw your attention to the Bitcoin options and to the Micro Bitcoin contracts. In Micro Bitcoin in particular the pace of growth has been very strong showing potentially more demand and interest from both institutional and retail accounts. This only adds to the story of growing interest and growing demand for bitcoin at a time of lessening supply.

Image 4: Generic Front Month Technicals

I always like to take a look at the charts before doing any trades for the discipline of entry and exit levels. The top chart is the daily chart of Bitcoin Generic Front Month futures. I can see the strong price movement this year and the consolidation futures have gone through the past month. The MACD lines in the middle panel look set to turn higher, which would be a bullish signal. While futures got overbought back in February, the sideways price action the past month has worked off that overbought condition. In the bottom chart, I look at the weekly price action for futures. In this one, it is a bit more of a bearish looking set-up as the weekly MACD looks like it could be set to turn lower in the coming weeks. In addition, the weekly RSI is still very much in overbought territory suggesting that longer-term players may find now is a good time to take some risk off the table. The differing set-up between daily and weekly cast some doubt in my mind about the strength of any move that could come from the catalyst of the halving combined with the growing demand I see in futures, options and ETFs.

Image 5: Implied volatility term structure for Bitcoin options

It is interesting to see the term structure of volatility around the halving. Perhaps it is because the moves can and do take many months or even a year to play out, but there is actually a reduction in implied volatility for the options expiring immediately after the halving relative to those happening just before or months after the event. One read on this situation might be that traders are looking for this event to be more of a buy the rumor/sell the news scenario.  I can see that more clearly in the bottom chart, which is the Event Volatility Calculator from the CME Group. I can put in the date of the event and the calculator will show me any forward implied volatility in the market. In this case, the calculator suggests no forward volatility is seen telling me that traders are not expecting a major catalyst from this Bitcoin halving.

Image 6: Implied volatility by strike and volatility surface for Bitcoin options

The next stop is to consider whether there is a preference for out of the money options vs. at the money options as well as to see in tabular form how the implied volatility by strike and date line up.  Putting the news together above, I sense there could still be a catalyst from the Bitcoin halving to occur, especially because there are demand as well as supply set-ups. Traders are pricing in more of a non-event, which makes me want to generally buy options as the catalyst may not be priced in. However, the conflicting signals from the daily and weekly charts has me feeling like this could still be a positive catalyst, but perhaps the reaction to the news will be more muted than we have seen in the past. The charts above tell me that if I want to sell options, I may find more option premium on a relative basis in the out of the money options.  This is true for nearer dated options, as kurtosis flattens out the further out I look. The volatility by strike and date show me there really is not much difference depending on where I look for my strikes as the curve it pretty flat.

Image 7: Expected return for a BTCJ4 1 by 2 call spread overlaid on top of a long futures position

The idea I have chosen is an April 26 expiration, 75,000-80,000 1 by 2 call spread, overlaid on top of a long futures position. The idea here is that the 1 by 2 call spread can lever returns on moves higher for the long futures position. If I decompose the position, I really end up with a 75,000-80,000 call spread and a long futures short 80,000 buy write position. The total trade takes in 1,000 ticks which can give the benefit of effectively lowering the basis of the long futures trade. With futures at 72,330, the breakeven on the trade to the downside is 71,238, so a 1,000 tick reduction in the futures basis. The position has higher returns than a long futures outright position, but the positive profits are capped at 80,000 where the short strike exists. I have looked at a near date option here, but one could consider this same idea at any expiration, even choosing to look out several months if they wanted. That would also afford the opportunity to widen out the strikes to give more room for a move higher. It is important when choosing strikes to find those where I can earn to sell the 1 by 2 call spread because that money I earn is what lowers my basis.  If the event is a buy the rumor and sell the news, and we drift lower, I would be better off having done the 1 by 2 than simply being long futures. The comparison for this position is to a long futures position and I’d be better off on a move lower from the lower basis, as well as to a move higher up to 80,000. The place where I would be better off with futures only is on a sharp move higher, above 85,000 by expiration. In this scenario, I would be capped at 13,000 ticks in total return. However, as I had leverage up to 80,000, this is equivalent to a move to 85,000 in the futures (the breakeven on a standalone 75,000-80,000 1 by 2 call spread). Here is one example of using a 1 by 2 call spread instead of just a long futures contract to manage risk and express my opinion to the upside. If my view is the halving can take me above 85,000 by the end of April, then this isn’t the trade I’d make. However, in other cases, I may be better off considering boosting my returns by adding a 1 by 2 call spread to any long futures.

Good luck trading!

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