Citizen Play of the Week: Hedging Against Disaster
This week brought with it an undeniable vibe shift in the crypto market. Just last month, investors were eagerly anticipating new all-time highs, but the past few days have been marked by significant declines in crypto’s majors and profound weakness for many top altcoins.
In our citizen-exclusive Bankless article published last week, we revealed how risky 0DTE crypto options can enable you to profit big from sudden market swings. The recent fall in prices proves just how powerful such options can be, with 0DTE put options returning core-shaking multiples amid the chaos!
Fortunately, options aren’t all about short-term speculation and gambling. Today, we’re exploring how longer-dated put options can help to hedge your portfolio against catastrophic losses in another disastrous downside scenario. 👇
🧐 Why Options?
For market participants who aren’t quite ready to cut all crypto exposure, but who remain fearful of future drawdowns, diverting a relatively small percentage of their portfolio to make an opposite bet (i.e.; hedging) could be a worthwhile endeavor to protect against potential losses.
While perpetual futures have become commonplace among crypto traders, as we highlighted last week, crypto assets are prone to wild fluctuations in price, subjecting even directionally correct positions to liquidation and forcing traders to chase market moves.
Alternatively, in exchange for a fixed one-time payment, options holders receive the right to buy (call) or sell (put) an asset at a fixed price until a future date, allowing them to forgo all risks of price-based liquidation.
In comparison to speculative options strategies intended to generate profit, like purchasing explosive zero-days to expiration options, hedging is a powerful portfolio management tool that allows traders to derisk their existing positions.
Jack Inabinet Feb 13, 2025 • 5 min read
🦔 How to Hedge
Crypto call and put options can be purchased through a variety of platforms – including centralized and decentralized crypto-native exchanges – but for investors worried about true calamity, acquiring such options through a traditional stock brokerage may be the best strategy, as these venues offer better pricing than decentralized alternatives and have a much lower risk for insolvency or fund misappropriation compared to CEXs.
Your favorite altcoin is unlikely to be listed in a traditional stock brokerage, and in the United States, only a select spot BTC exchange-traded funds (ETFs) have listed options. Although hedging a diversified portfolio of crypto assets with BTC options is not ideal, it should enable you to capture offsetting gains in the event of a market-wide selloff.
Hedges can be placed using put options of any maturity date, but for investors uncertain about when a drawdown could occur or how long it will persist, options that expire multiple weeks or months in the future are the best bet.
Options are priced based on a multitude of factors, and while further-dated options are more expensive, they provide greater flexibility and allow for less active investors to set-and-forget their downside protection.
Additionally, while the value of an option is bound to fluctuate over its lifetime, a put hedge maintains the same short exposure throughout its life, and options that expire further in the future are less susceptible to daily changes in the price of the underlying (for the purpose of this example, we will use BlackRock’s IBIT).
To perfectly hedge a portfolio of 100% BTC from all downside, an investor would want to purchase at-the-money IBIT put options, meaning they have a strike (the guaranteed price at which IBIT can be sold until expiration) equal to the current share price of IBIT, which was $48 at the time of this analysis.
On traditional exchanges, call and put options are sold in bundles of 100 shares, meaning that purchasing one IBIT put option at $48 will protect a portfolio of $4,800 BTC from all downside until the maturity of that option.
Seen below is the option chain for IBIT puts expiring on April 4, 2025, as of market close on February 26, 2025. In this example, each $48 IBIT put option costs $305, and purchasing one eliminates all downside risks for a hypothetical portfolio of $4,800 BTC for more than six weeks.
Investors seeking protection from a catastrophic crash, but who are comfortable bearing some downside risk, may desire out-of-the-money IBIT puts, which have a strike price below the current price of IBIT.
For example, an investor seeking protection against a BTC drawdown exceeding 16.6% until April 4, 2024, could purchase the $40 IBIT puts shown above for just $60.
While these options will provide no coverage for as long as IBIT stays above $40, they are one-fifth of the price of the $48 IBIT puts, enabling hedgers to secure more cost-effective downside protection in the event of a large market drop.
❓ Should You Hedge?
Every investor has a unique situation, and while we cannot recommend whether you individually should hedge your crypto portfolio, we can certainly alert you to this option!
Crypto markets are no longer trading all-time highs, but for investors fearful that an impending dip could significantly reduce their portfolio value, purchasing IBIT or other BTC-related ETF puts that expire multiple weeks/months from now remains a viable low-cost strategy to derisk and earn profit in the event of a market decline.