We’re going to dive into a long-term crypto play using a LEAPS options trade in just a moment, but first, tell me if you’ve heard this scenario before. Crypto prices are at all-time highs, having generated triple- or quadruple-digit returns for traders and investors. Online message boards proclaim that it’s “up only” season and new millionaires are being minted seemingly every day.
Then, the unthinkable: prices collapse, exchanges fail, crypto “blue chips” lose 60%, 70%, 80% of their value.
You’d likely assume that the story I’m writing is the story of the 2022 market, replete with Ponzi tokens, SBF’s incestuous self-dealing, and a crypto bloodbath that dragged the price of Bitcoin (BTC) down 74% in a year.
However, I’m also writing the story of the collapse of the Mt. Gox exchange in 2014, which saw BTC lose 85% of its value, falling from just over 1,100 to a low of 178 in January of 2015.
I’m also writing the story of the crypto winter of 2018, which saw Bitcoin prices collapse 84% in a year.
This is all just a way to say that we’ve seen this before. History doesn’t repeat itself, but it does rhyme.
So, you may be wondering, what happened to Bitcoin prices next?
Well, in the calendar year following the 2015 bottom, Bitcoin was up 143%. After two years, it was still up 117% from the bottom.
A year from the 2018 low saw prices 136% higher. After two years, BTC was up 650%.
Now, a lot of the criticism leveled at crypto and DeFi (decentralized finance) proved true last year. Scams and fraud were rampant. Much of the technology simply tried to financialize software that didn’t need financializing.
But the best use case that exists right now, uncensorable money, remains a valuable tool. There are documented instances of women in Afghanistan using crypto to store money while fleeing the Taliban.
Consider this hypothetical as a counterpoint to a competing offering that’s been floated by central banks globally: a Central Bank Digital Currency (CBDC). Issued by central banks but recorded in a digital blockchain. This is currently being explored for cross-border settlement and not individual use, but a White House policy framework has already documented the government’s interest in using a CBDC to promote equitable financial market participation and anti-money laundering (AML) compliance.
Let’s imagine they start offering a tax discount to incentivize the adoption of the digital currency, say, a federally funded 1% sales tax discount on any transaction using CBDC. Easy enough to track on the blockchain, so the federal government could repay states for lost sales tax.
This hypothetical leaves aside the legal/legislative/policy considerations but is a useful thought exercise.
Next, imagine that the political party that you disagree with the most takes power. Now, we have widespread adoption of CBDC and people we don’t agree with in power. So, since it’s tough to pass legislation banning whatever it is that appeals to the base—abortion, red meat, GMO foods, whatever (your ideology doesn’t matter)—they simply turn off your ability to spend your CBDC on whatever it is they oppose. Essentially holding political opposition hostage by their purse strings. Democrats in control? Can’t donate your CBDC to the RNC or spend it on factory-farmed foods. Republicans in control? Can’t donate your CBDC to the DNC or Planned Parenthood.
This is not a policy judgment, just a case for the rumors of crypto’s death being greatly exaggerated.
A LEAPS Options Trade in Bitcoin
If you’re not a crypto devotee but are interested in speculating on a recovery in the price of Bitcoin, there are attractively priced LEAPS going out as far as January 17, 2025, in the ProShares Bitcoin Strategy ETF (BITO). The 10 and 12 strikes each have four-digit open interest, which helps keep the bid/ask spread reasonable, and last traded at $4.33 and $3.65, respectively.
More sophisticated investors who are willing to deal with higher volatility and lower liquidity can also find value with deeper-in-the-money LEAPS, like the lower-volume 5 strike. The 5 strike last traded at $6.38; a buy of the 5 strike and a sale of the 10 strike would be a $2.05 bull call spread that would be worth $5 upon expiration if BITO stays above 10.
Systemic Risks to the LEAPS Options Trade
If this were a simple equity trade it would look like a no-brainer, but a BITO LEAPS option isn’t just a simple equity trade.
The fund invests in futures contracts to replicate the price performance of Bitcoin, rather than holding Bitcoin directly. The costs of those contracts are not prohibitively high, but in the event of a two-year sideways market for cryptocurrencies, contract costs alone would likely drag prices of the ETF lower.
Also, after the collapse of FTX and Alameda, there have been increasing calls for regulation and oversight. While the government can make holding Bitcoin illegal (it happened with gold), monitoring direct investment in self-custodied Bitcoin could prove too tall a task for the U.S. (just as it has with China). But it would be much more straightforward to simply shut down BITO and force liquidation, should the regulatory winds ever blow that way.
As you can see from the chart below, there’s not much momentum behind BITO, and the fund is still below its 50-day moving average and well below the 200-day.
However, longer-term investors with an appetite for risk could see strong returns if Bitcoin comes out of this bear market the way it has in the past.
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