Bitcoin‘s nearly 9-month slide has even HODLers quaking in their boots.
Despite the severity of the sell-off so far, several of the most reliable technical indicators — specifically exponential moving averages (EMA), weighted moving averages (WMA), MACD, and the Directional Movement Index (DMI) — continue to lean decidedly short.
History provides a stark reminder of how deep crypto winters can cut. Prior to the current cycle, bitcoin’s five worst historical drawdowns were significantly more brutal; four of them exceeded 80%. If a similar capitulation plays out today, a retracement of that magnitude would drag the digital asset back into the $22,000 neighborhood.
Bitcoin, YTD
This weakness isn’t occurring in a vacuum. Broad-based inflation hedges and commodity complexes are experiencing a parallel breakdown. Precious metals like gold and silver have recently cracked below their long-term moving averages. In base metals, while copper has managed to hold its ground so far, aluminum just crossed below its 200-day moving average.
Outright shorting bitcoin or high-beta crypto equities after a steep decline carries immense tail risk. Maybe this crypto winter won’t be as severe as the prior ones, and even if it is, vicious bear market rallies can ultimately wipe out short positions overnight. Instead, we can look to an approach executed successfully over the past year by one of our top-performing option income funds, which deployed structurally bearish directional positioning against MicroStrategy (MSTR) to harvest rich premiums.
Retail investors can replicate this defensive, risk-defined posture using highly liquid options vehicles such as the iShares Bitcoin Trust (IBIT) or the aforementioned Strategy Inc. (MSTR). By selling out-of-the-money upside call spreads, you can establish a bearish tilt while strictly capping your maximum loss.
My below trade is for Strategy.
Consider this structured risk-reward layout using a representative weekly options chain to see how the mathematical advantage favors the seller:
The trade
- Strategy – Bear Call Spread (Credit Spread)
- Underlying Price – $86.93 Reference
- Strikes – Short $87 Call / Long $90 Call (August 7th Weekly)
- Net Credit Collected – $1.50
- Maximum Profit – $1.50 (If underlying finishes below $87)
- Maximum Loss – $1.50 (If underlying finishes above $90)
1:1 payoff ratio might not seem compelling at first, but this is an out-of-the-money spread. Consider that the underlying stock can only do three things by expiration:
- It can go lower: Both options expire worthless; you retain the full $1.50 credit.
- It does nothing at all: The price remains below the short strike; you retain the full $1.50 credit.
- It goes higher: 1) For you to realize the maximum loss of $1.50, the price must climb all the way past $90 at expiration, capturing the full width of the $3.00 spread minus the $1.50 premium collected. 2) A naked short carries unlimited risk. This doesn’t.
Momentum is clearly still negative, but trying to time an exact bottom or press shorts at lows is a dangerous game. While it’s perfectly acceptable to continue to lean short right now, do so with defined risk and let time be your ally. Use defined-risk credit call spreads to collect income while the crypto market (and, by extension, Strategy Inc.) sorts itself out.