Stocks & Options: How to Take Advantage of Crypto Price Trends
Updated: May 9, 2021
In the USA and many other countries around the world, governments have made investing in cryptocurrencies difficult to downright impossible. Even if you are able to invest in crypto, the vast amount of information and dangers out there regarding wallets, exchanges, hacks, scammers, pump and dump schemes and ponzi scheme currencies can make even the most foolhardy among us think twice about jumping in. The truth is, you need to do your homework and some people just aren't able to or want to spend the time to do the prerequisite research to protect themselves. Additionally, crypto trading is a higher risk than the US stock market because the SEC has your back. Ha ha just kidding-they're out to make sure the hedge funds take 99% of the pot. What they do to make sure the hedge funds win however, is require strict accounting practices for public companies. This provides an added layer of security you do not have with cryptocurrency trading.
I will split this newsletter into 3 segments to make things easier to follow, and so that those with knowledge about any one area can feel free to skim or skip the segment entirely. These sections are:
Public companies that trend with cryptocurrencies
Current crypto price trends we have found at Booyah Traders
Strategies to use for pattern trading stocks and options based on crypto price trends.
1) Public companies that trend with cryptocurrencies
There are three types of companies that trend with crypto prices. The primary being companies whose principal focus is to work with cryptocurrencies. These would include crypto mining companies and crypto trusts. Secondary would be companies who have turned a large percentage of their free capital into cryptocurrencies. These companies believe that holding crypto as an asset will provide a better return than holding the dollar or any other form of currency. The final group would be companies whose products are used for cryptocurrencies in some way, such as Nvidia or AMD, whose graphics cards are highly sought after for mining operations. The price trends of crypto influence the first group most and the tertiary group the least. The purpose of this article is not to provide a detailed analysis of these companies, but to describe how to pattern trade these companies' stocks. Please do your own due diligence before deciding which of these companies you wish to invest in.
Group 1 - Companies whose stock prices are most influenced by crypto prices due to their operations relying on cryptocurrencies
Bitcoin Mining Companies: RIOT, MARA, HVBTF, CAN
Bitcoin Trust: GBTC, OBTC
Etherium Trust: ETCG
Many companies are attempting to start crypto ETFs and it's only a matter of time until there are a myriad of tickers to pattern trade.
Group 2 - Companies whose stock prices are greatly influenced by crypto prices due to their held assets. These companies' primary operations are not influenced by cryptocurrencies.
MicroStrategy/MSTR: Holds 91,579 Bitcoins worth approximately $5.3B
Tesla/TSLA: Holds 48,000 Bitcoins worth approximately $2.6B
Square/SQ: Holds 8,027 Bitcoins worth approximately $463M
Group 3 - Companies whose stocks are somewhat influenced by crypto prices due to their products being used for cryptocurrency operations.
Graphics cards manufacturers (Crypto Mining): NVDA, AMD
Various semi-conductor manufacturers
These companies' stock prices tend to rise during bull runs and remain stagnant or increase more slowly during bear markets. This trend is a result of the number of people investing in mining rigs to take advantage of high crypto prices. 2021 is an anomaly however, due to the semi-conductor shortage. Without a shortage, these companies would have seen large share price increases. Currently it is extremely difficult to obtain a current generation graphics card. Yours truly waited overnight outside a Microcenter for about 8 hours in November to get one at store opening. I was 10th in line.
2) Current crypto price trends we have found at Booyah Traders
In this section I will post updated charts from recent newsletters, reflecting current prices and trend changes. I will provide a brief analysis of each and summarize our primary conclusions.
Prices of all cryptocurrencies trend with Bitcoin. When Bitcoin's price rises, altcoins soon rise with it. When Bitcoin's price falls, altcoins drop simultaneously. We can pattern trade all cryptocurrencies by analyzing Bitcoin price trends.
The waxing and waning of Bitcoin prices have been trending with monthly Bitcoin options expiry dates. We do not have data for previous months "Max Pain Price", the price in which most contract buyers lose their money, but we can see that on April 30th the price at time of expiration was very close to the Max Pain Price.
Monthly options contracts expire on the last Friday of each month.
Most options contracts sellers are "Market Makers" meaning they have an abundance of assets at their disposal to manipulate prices to their needs.
Allowing prices to rise results in call contract buyers to purchase high strike price contracts. After these high strike price contracts are purchased, the price of Bitcoin drops to conform to the Max Pain Price.
The Market Makers are almost certainly buying after contract expiration date and selling a bit before expiration to bring the price to where they want it. We want to copy this behavior
The above chart helps with approximate dates of trend changes and the price at options expiration, but how can we estimate prices?
Bitcoin has been sitting in this Fibonacci Channel for approximately 3 months and it is likely to continue. The price predictions on the above chart are reasonable estimates based on past performance and match the current Max Pain Price for May 28th options expiries.
The above chart shows the open interest of various strike prices for April 30th options expiry. At expiration Bitcoin's price was $54,500. All puts at a strike prices below this will expire worthless and all calls at strike prices higher will expire worthless.
The above chart shows open interest of various strike prices for May 28th options expiry. Contracts can still be bought and sold, but if these were to expire today all puts with strike prices below Bitcoin's current price would expire worthless and all calls with strike prices above Bitcoin's current price would expire worthless. We can expect that on May 28th the Max Pain Price will be near the above stated $55,000 and the price of Bitcoin will be near the Max Pain Price.
The above chart shows Bitcoin options open interest by expiration. The "Weeklies" have much lower interest than the "Monthlies" because Weeklies are only sold within one month of expiration while Monthlies are sold far in advance. Even higher open interest is the Quarterlies. June 25th already has more open interest than May 28th and the end of quarter 1, March 26th, had almost double the open interest as either February or April options. The more open interest on any particular date, the more likely price manipulation by contract sellers will occur.
The above chart shows Deribit's dominance in selling Bitcoin Options contracts. Currently over 90% of contracts go through the Deribit exchange, which is why we focus on their data to determine prices at expiration days.
3) Strategies to use for pattern trading stocks and options based on crypto price trends
The easiest method for this also holds the lowest risk: purchase stocks from groups 1 and 2 while Bitcoin's price is low (near options expiration day) and sell these shares when prices are high (around mid-month). Group 1 is higher risk, but the share price trends more closely with Bitcoin's price. Group 3 does not correlate well enough with Bitcoin's price to be worth trading based on the price trends.
The above chart shows percentage gain/loss of Bitcoin along with Group 1: RIOT (orange), MARA (blue) and GBTC (yellow). While GBTC price tends to have a fairly equal shape to BTC price, the Bitcoin Mining companies have much more volatile price swings. Some of this is due to the fact that during crypto's current bull run many people wanted to get in on the action through the stock market. These volatile swings are great for pattern trading and we can certainly take advantage of it.
The above chart shows percentage gain/loss of Bitcoin along with Group 2: TSLA (orange), SQ (blue) and MSTR (yellow). MSTR has a higher percentage of their funds in Bitcoin and therefore more dramatically trends with Bitcoin. SQ and TSLA still hold the price pattern but do not change by as high a percentage. Therefore SQ and TSLA would be lowest risk to pattern trade with BTC price, but would also yield the least rewards.
The highs and lows in the above price chart of RIOT coincide closely with the dates of BTC price trends. Mara's chart is nearly identical in shape with RIOT's.
Buying shares of these stocks means that if the price doesn't trend as you expected it to, you still own the shares and can either sell at a loss or wait for the price to come back up. If you are willing to take on higher risk, the rewards will be much greater if you correctly pick future BTC prices and are willing to trade call and put options. However, if options expiration day comes and you were incorrect in your assessment, your contracts can expire worthless.
Call Option: A contract to buy assets at an agreed upon price (strike price) between now and the expiration of the contract. With a call option the contract buyer is agreeing to purchase the stock at the strike price, but if on expiration day the stock price is lower than the strike price the contract expires worthless.
Put Option: A contract to sell assets at a agreed upon price (strike price) between now and the expiration of the contract. With a put option the contract buyer is agreeing to sell the stock at the strike price, but if on expiration day the stock price is higher than the strike price the contract expires worthless.
Each options contract is for 100 shares and the buyer pays an initial non-refundable "premium" to purchase the contract. This premium is tied to the stock's volatility, how much time is left in the contract, and how close or far away the strike price is from current price. Earlier in the year when prices were more volatile, RIOT and MARA held extremely high price premiums. The volatility has decreased but still encounters greater gain/loss percentages than bitcoin itself. The premium price listed on an options chain is a per share price.
The above RIOT options chain shows a May 14th contract expiration (10 days from now) along with premium prices per share for various strike prices. The left side shows call option contracts and the right side put options contracts. The current price of RIOT is around $39 per share. If you bought a call option contract with a $40 strike price and a premium of $3.35 per share, RIOT would need to be $43.35 per share on May 14th for you to break even. If RIOT was $53.35 per share on May 14th, you would be up $10 per share.
With options contracts you can always sell the contract before expiration and receive the premium back from the buyer of your contract. The beauty of options is the ability to control so many shares with a low upfront cost. In the above example you would have paid $335 for 1 contract (100 shares) and profit $1000. To gain that same profit when buying the actual shares you would have had to spend $3900. Of course, options are very risky and you have no underlying asset you can sell or hold if RIOT's price does not hit your strike price.
The above RIOT options chains show how time affects the premium price of call and put contracts.
Your best bet to have both security and potential for high gains would be to purchase 100 shares for every 1 or 2 contracts purchased, thereby lowering your total risk. In addition, giving yourself some breathing room with a farther away expiration date also helps, but you pay a higher premium. If you have the funds, this does not make a big difference because you will sell the contract before expiration and get the remainder of the time component of the premium back.
When Bitcoin is in a dip, you can buy near the money call contracts or many out of the money call contracts for a very low premium price. When the price of Bitcoin rises, you sell your call contracts and purchase puts. Options contracts allow you to potentially profit off an increase in share price as well as a decrease in share price.
Apologies that this Newsletter is so long! I did not know how to relay all this information in a succinct manner. Hopefully this article was helpful!