How to Short Bitcoin with Options

By Market Rebellion

Most investors believe Bitcoin will see 10,000 before it sees 30,000. If you agree, here’s how you can use options to put your money where your mouth is.

(~BTCUSD) has been on a massive downward spiral following its November 2021 all-time high. The leading cryptocurrency is currently down more than 70% since then.

According to a recent survey, the majority of investors believe there’s more downside for BTC ahead.

Investors believe that Bitcoin is likely to hit $10,000 before it hits $30,000 — an ominous prediction. Survey sourced from MLIV.

The last time Bitcoin traded at $10,000 was nearly two years ago in September of 2020.

With the success of Bitcoin bears throughout 2022, you may be wondering how you can join in on the bearish betting.

Three Ways to Short Bitcoin

There are a few different ways to bet against Bitcoin, each with its own pros and cons. Some Bitcoin bears use exchanges like FTXLedger to buy direct put options on cryptocurrency itself. However, this direct exposure comes with a price: these types of exchanges suffer from extremely low liquidity, making order execution difficult and often costly.

Another strategy to short crypto is to use margined exchanges like KuCoin to take out high-leverage short positions on Bitcoin — this is a valid option, but a very risky one. One upward surge in an asset class known for its high volatility could lead to the liquidation of your entire portfolio — a fate that even institutional investors aren’t immune to.

While these short Bitcoin strategies can be effective, there’s a better way. In our search for bearish Bitcoin strategies, we need to look no further than institutional option trades.

How Institutions & Hedge Funds Use Options to Short Bitcoin

Institutional traders have a clear weapon of choice that they use when they want to get bearish on Bitcoin: Put options on the relatively new ProShares Bitcoin Strategy ETF, BITO.

ProShares’ Bitcoin Futures ETF BITO started trading just one month before Bitcoin’s November all-time high. Since it debuted at $41.23, it has fallen 69.2% — much to the satisfaction of bears.

Let’s take a look at how one Bitcoin bear actively managed their BITO put options to rack up big gains on the ETF as it fell more than 50%.

Source: Market Rebellion's Unusual Option Activity Service

Starting in February, with (BITO) - Get ProShares Bitcoin Strategy ETF Report trading at $26.65, this trader spent $1.57 million dollars betting that BITO would fall below $25. It did. Within two weeks, the trader rolled those March $25 puts to April $21 puts, collecting a more than 50% gain on the original puts and upping his/her bet to a total cost of $2.912M.

Roll: Selling an option and simultaneously buying another option in the same equity with the same directional bias. Can be at a lower strike (rolling down), at a higher strike (rolling up), at a further expiration (rolling out) or at a nearer expiration (rolling in).

One month later, the newly rolled trade wasn’t going his/her way — BITO had risen to $25.72 from $23.73. But rather than cutting the trade, this trader rolled up. They used the sale of thousands of April-expiring puts to finance a purchase of 9,000 May-expiring $23 strike puts, ringing the register on a trade that was now worth a value of $1.575M.

This bold move would set the course for a series of gains.

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Each arrow indicates a put trade in BITO. Source: TradingView, Market Rebellion

The bearish Bitcoin trader would go on to roll those options three more times in May as the price of BITO fell by more than 20% — collecting profit while maintaining bearish exposure to the trade throughout the early summer months.

Were they done? Absolutely not. In June, they picked up a fresh batch of BITO puts for more than $318K, valued at $0.42-$0.43 apiece. Today (one day before expiration), those puts traded as high as $2.89 — nearly 7X the trade amount, valuing the original $318K bet at a high of $2.1675M. This value isn’t even accounting for any of the previous bearish Bitcoin option trades. Despite all the profit they’ve now accrued and the ITM expiration of their June puts they still aren’t done — re-engaging in new BITO puts yet again as recently as July 11th.

So if you’re wondering if it’s too late to get in on the bearish Bitcoin frenzy, it appears the “smart money” doesn’t think so.

The Bottom Line: How Can You Make Bearish Bets on Bitcoin?

Though there are multiple methods to gain short exposure on Bitcoin, the smartest and most popular method is to use long put options on BITO. And if you’re looking to add an additional edge to your trade, consider following institutional trades using Market Rebellion’s Unusual Option Activity service. By watching institutional option order flow, you could mimic the trades and risk-management style of behemoth traders like the Bitcoin bear above.

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