The Bitcoin blockchain underwent a major event in April 2024: the Bitcoin halving. Expected to take place roughly every four years, this mechanism was written into Bitcoin's code during its inception and aims to slow down the creation of new bitcoins and eventually reach a finite supply of 21 million BTC. Similar to huge network upgrades like the Ethereum Merge and Dencun, the halving is a highly anticipated event that can significantly impact Bitcoin miners and traders.
Curious to know how you can trade off the volatility that could occur post-halving? From explaining the importance of the Bitcoin halving to setting up optimal Bitcoin options trading strategies, here are some trading ideas to consider related to the Bitcoin halving.
What is the Bitcoin halving?
A Bitcoin halving is a pre-programmed phenomenon that's part of the Bitcoin protocol. Once 210,000 blocks are mined, Bitcoin mining rewards are then reduced by 50%. Before April 2024, miners received 6.25 BTC per block. After the halving, this reward was reduced to 3.125 BTC per block. This drastic reduction in supply happens in an effort to control inflation and maintain the scarcity of Bitcoin.
Why is the Bitcoin halving important?
From classic economic theories to the psychological impact of FOMO, here are some reasons why the Bitcoin halving is important:
Engineered scarcity due to supply and demand
Just like the Ethereum Merge and Ethereum's transition to Proof of Stake, the halving in Bitcoin's Proof of Work system introduces scarcity. With fewer new BTC being created, the existing Bitcoin supply might become more valuable over time if demand keeps increasing. This finite supply is meant to mimic precious metals like gold. Bitcoin enthusiasts believe this could make Bitcoin more attractive as a store of value in the long run, while creating volatility in the short-term as the market reacts to this decrease in overall supply.
FOMO-induced trading
Apart from Bitcoin's limited supply, a huge reason why each Bitcoin halving is important is the psychological impact it seems to have on crypto natives and non-natives alike. The halving creates a predictable schedule of supply reduction events that happen every 210,000 mined blocks. These anticipated events ultimately generate excitement and increased buying pressure around the halving date, potentially impacting Bitcoin prices pre and post-halving. The buzz surrounding these events can also pique the interest of newcomers to crypto, drawing them in with the headlines and hype associated with the halving.
Cleaner and greener Bitcoin mining
Bitcoin prices aside, the halving could also kickstart innovations in the energy efficiency of Bitcoin mining. Driven by the significant reduction in block rewards after the Bitcoin halving, miners face the need to innovate or get left behind. This economic pressure triggers a wave of competition within the crypto mining industry, pushing miners to explore operational optimizations like adopting more energy-efficient ASICs, using renewable energy sources, and pooling resources to negotiate for better electricity rates. This focus on efficiency encourages a more competitive mining landscape, potentially leading to a rise in the network's overall hashing power with a lower environmental footprint.
Potential outcomes from the 2024 Bitcoin halving
The halving's impact on Bitcoin's price can be multifaceted given the numerous pieces that make up the Bitcoin puzzle. Whether you're bullish, bearish or neutral, our guide to trading Bitcoin during the 2024 Bitcoin halving will analyze some potential outcomes and trading ideas that you might want to consider. Here's a primer that briefly summarizes the underlying thesis supporting each outlook:
Bullish outlook: If history repeats itself, the Bitcoin halving could trigger a price surge for Bitcoin. After the previous halvings in 2012, 2016, and 2020, Bitcoin prices experienced exponential growth. Crypto traders anticipating a similar rise might FOMO and buy in before and immediately after the 2024 Bitcoin halving, driving up BTC prices to new all-time highs. Additionally, some experts are also taking the bullish inflow from TradFi traders into account since they now have access to Bitcoin via the spot Bitcoin ETFs.
Bearish outlook: Buying the rumor and selling the news seems to be the go-to strategy for many crypto traders as some believe that the halving was already priced in by the market given Bitcoin's meteoric rise since late 2023. Many bearish crypto traders are therefore expecting a slight pullback in BTC prices once the Bitcoin halving is completed, which could begin once bullish traders who bought in early lock in their profits by closing their long-BTC trades.
Neutral outlook: Some traders believe the latest Bitcoin halving will not cause a significant price swing. Much like previous Bitcoin halvings, BTC prices may remain stable as the market adjusts to the reduced block rewards while bullish and bearish crypto traders battle to maintain control in the crypto markets.
How to trade Bitcoin: options strategies for each outlook
If you're wondering how to trade Bitcoin and volatility expectations reaching sky-high levels, here are some Bitcoin options strategies worth considering ahead of the Bitcoin halving to put yourself in the best position possible. Given that our options strategies take into account the possible maximum losses incurred, it might be a suitable alternative to outright short-selling Bitcoin.
We'll be referencing our chain of BTC options for all contract prices that are accurate as of April 9, 2024. To keep things simple, we'll also be using Bitcoin's last traded price of $70,905 and options contracts with an April 26 expiry date as the basis of our Bitcoin halving options strategies. Do note that the strike prices of options contracts offered below in each example are points of educational reference and are simply used to illustrate the overall risk and reward undertaken by crypto options traders. Depending on your personal risk appetite, you're free to select alternative strike prices to tweak your own risk-to-reward ratio.
Bitcoin halving price predictions: bull, bear, and neutral case
Before diving into the mechanics of each Bitcoin halving options strategy, here's a broad overview of Bitcoin price predictions and projections to keep in mind when executing these strategies. Curious about the thesis for each outlook? Read on as we explain the rationale behind the suggested Bitcoin options strategies.
Outlook | Bitcoin option strategy | Bitcoin price prediction |
Bull case | Bull call spread | $77,000 - $82,000 |
Bear case | Bear put spread | $61,000 - $66,000 |
Neutral case | Iron condor | $64,000 - $78,000 |
Bullish Bitcoin options strategy: bull call spread
If you’re bullish about the Bitcoin halving and believe that the market is still underpricing the impact of spot Bitcoin ETFs on the overall popularity of Bitcoin, a possible Bitcoin options strategy would be a bull call spread. This strategy helps crypto options traders adopt a bullish stance while keeping losses at a minimum due to the written OTM call contracts that allow you to stay leveraged on Bitcoin with short-term ITM calls at a discount.
To execute this bullish options strategy, you would begin by buying in-the-money (ITM) call options. Thereafter, you'd write out-of-the-money (OTM) call options. For this bullish Bitcoin options strategy example, we'll reference buying the $65,000 call contract and selling the $82,000 call contract.
Max gains: difference between call strikes - net debit paid = ($82,000-$65,000) - ($7,899-$1,347) = $10,448
Max losses: net debit paid = $7,899-$1,347 = $6,552
Taking the above calculations into account, should Bitcoin trade at $82,000 by expiry, options traders adopting this bull call spread strategy would stand to make gains of close to 160% with a maximum expected loss of $6,552.
Bearish Bitcoin options strategy: bear put spread
If you’re bearish about the Bitcoin halving and believe that the market participants will sell the news since the halving is a major catalyst, an interesting Bitcoin options strategy to consider could be a bear put spread. This strategy is designed to help traders lock in gains from declining prices. Similar to the aforementioned bull call spread, a bear put spread is more affordable than solely buying a put option, since the written OTM put option helps to discount the cost of the premiums incurred by the purchased ITM put option.
To execute this bearish options strategy, you'll have to first buy ITM put options. To complete the two-legged options strategy, you'll then sell OTM put options. For this bearish Bitcoin options strategy example, we'll reference buying the $77,000 put contract and selling the $61,000 put contract.
Max gains: difference between put strikes - net debit paid = ($77,000-$61,000) - ($8,253-$971) = $8,718
Max losses: net debit paid = $8,253-$971 = $7,282
After taking into account the potential risk-to-reward ratio for this Bitcoin options trade, if Bitcoin trades at $61,000 by expiry, options traders who adopt this bear call spread strategy could stand to make gains of close to 120% with maximum expected losses limited to $7,282.
Neutral Bitcoin options strategy: iron condor
Given the potential volatility of Bitcoin, it might seem unlikely for Bitcoin prices to remain unshaken by the volatile catalyst that is the Bitcoin halving. Yet, previous Bitcoin halvings seem to have proven otherwise as Bitcoin prices seem to have traded sideways post 2012 and 2020 Bitcoin halvings. By taking this into account, crypto options traders may opt to adopt a neutral approach towards trading the Bitcoin halving by executing an iron condor strategy. This involves writing OTM calls and puts as the short legs of the iron condor, and buying further OTM calls and puts that act as the long legs thereafter. Overall, this multi-legged strategy mainly prides itself on riding the wave of options volatility and collecting options premiums along the way.
To begin executing this neutral crypto options strategy, simply write OTM call and put options. After this, wrap up the second portion of the iron condor by purchasing further OTM calls and puts. While the width of the iron condor ultimately depends on one's personal risk appetite, one can stay conservative by selling 10% OTM options for the strategy's short legs and purchasing 15% OTM options for the iron condor's long legs. Overall, this gives us strike prices of about $64,000 to $78,000 for the written contracts and $60,000 to $82,000 for the bought contracts.
Max gains: net credit earned - net debit paid = ($1,943+$1,688) - ($1,000+$1,028) = $1,603
Max losses: difference between strike prices = $4,000
While executing this four-legged crypto options strategy may seem complex, the iron condor is highly popular among risk-averse traders because, in order for the trader to incur maximum losses, Bitcoin prices would need to surge or crash by 15% in either direction post-halving. Options traders who execute this neutral strategy would stand to gain returns of about 40% based on the $4,000 that they are risking.
Final words and next steps
The Bitcoin halving is a crucial event in the cryptocurrency world that will likely capture the attention of trading veterans and Bitcoin newcomers alike. While its exact impact on Bitcoin prices is uncertain, it represents a significant step in Bitcoin's journey towards mainstream adoption.
By staying up to date with the latest crypto happenings, you'll be better equipped to trade on market movements and effectively manage your overall risk while navigating the BTC price fluctuations.
Keen to give Bitcoin options trading a go? Check out our crypto options for high options liquidity and affordable fees today. Conversely, you can also get started by first reading up on our crypto covered call and crypto cash-secured put options strategy guides to get yourself familiar with trading crypto options.
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