Bitcoin’s halving, which is expected to occur on May 11, 2020, is potentially going to disappoint many traders as it is most likely to be not just a “non-event” for the price bitcoin, but a bearish event. On one hand, market dynamics reveal short term bearishness for the price of bitcoin meanwhile, the price of bitcoin continues to trade in a range on both a daily and weekly time horizon. To take advantage of bitcoin’s current market environment, one could either sell volatility or “fade” the price of bitcoin going into the halving and post-halving.
The rally we are currently seeing in bitcoin is most likely a short squeeze being propelled by retail Fear of missing out (FOMO) and “smart money” buying into the news. When the halving commences, not only are we going to see a wave of selling by “smart money” traders, but we could also see a wave of selling propelled by small bitcoin miners as they must sell bitcoin in order to fund operations as they see their revenue getting cut in half. As a result, both institutions and miners selling into the halving should cause the price of bitcoin to fall leaving “FOMO” retail traders caught holding the bag.
Bitcoin’s price action is showing no signs of bullishness. If we look at bitcoin’s daily price chart (Figure 1.0), we see bitcoin is actually trading in a range. In fact, the price of bitcoin is now trading at the top of the range, which actually signifies a reversal in price (a bearish move).
Figure 1.0: Bitcoin‘s price trades in a range.
As we zoom out and look closely at bitcoin’s weekly chart (Figure 2.0), once again, we see no signs of bullishness. In fact, we see bitcoin trading in a declining low volatility range as the price of bitcoin makes lower highs and trades around the same lows. As a result, from a medium-term to long term investment horizon bitcoin looks like it will continue to trade in a declining low volatility range in the next 6 months.
Figure 2.0: Bitcoin’s weekly price chart.
There are two ways you can play bitcoin’s halving. Firstly, you can sell options into the halving, betting the price of bitcoin will either fall or continue to trade sideways. As you can see in Figure 3.0, although volatility is not as “rich” as it was during the initial COVID-19 pandemic, BTC volatility still trades above pre-COVID highs. Being that the price of bitcoin continues to trade in a declining low volatility range, this makes this the ideal environment to sell volatility.
Figure 3.0: Implied Volatility on Bitcoin Options (Skew.com).
Secondly, you can sell bitcoin at the top of the range it is currently trading in (Figure 1.0). You can use bitcoin futures to make this directional trade as shorting spot bitcoin will have you pay borrowing costs and almost every bitcoin perpetual swap is currently forcing shorts to pay longs a funding rate (Figure 4.0). Ideally, if funding rate turns positive, a short perpetual swap trade would be the ideal instrument to take a directional short trade on bitcoin as you will essentially be “getting paid” to carry the perpetual swap position.
Figure 4.0: Currently, shorts have to pay longs a funding rate on every exchange except Binance. Although the funding rate is small, it is still an added cost to a short position trade.
As institutional investors “sell the news” and small miners liquidate their bitcoin in order to sustain operations, market dynamics are favoring a sell-off to occur in bitcoin post-halving. Although market players could continue to bid up the price of bitcoin into the halving, expect the rally to be short-lived as the price of bitcoin continues to trade in a range on both a shorter time horizon (Daily Chart) and on a longer time horizon (Weekly Chart). One can capitalize on the drop in bitcoin’s price by either shorting the bitcoin at the top of its trading range or by selling options betting that the price of bitcoin will either not go up or will continue to trade sideways.
-Edward Puccio, Digital Asset Analyst BKCoin Capital LP