Options traders interested in BTC should keep an eye on MSTR
Exactly two months ago I was discussing the chaos around Bitcoin (BTC) reaching the vaunted $20,000 level, and how it could have even more room to run. Later that week, BTC finally lost steam just south of $23,000, igniting the "Twitterverse" on fire as crypto bulls crawled out of the woodwork. I claimed the intrigue of the cryptocurrency was only the beginning, as cryptocurrency brokerage Coinbase filed a draft registration statement with the Securities and Exchange Commission (SEC), indicating an eventual initial public offering (IPO) is coming.
While this IPO idea has yet to come into fruition, flash forward to this past week and BTC on Tuesday catapulted above the psychologically significant $50,000 mark. By Wednesday, BTC hit a record of $51,735.38 and sported year-over-year growth of 430%, and per CoinDesk, could see a surge of twice that by the end of the calendar year. While this remains just a theory –one conveniently touted by a site called CoinDesk -- other investors also support the prospect of Bitcoin reaching six figures by year’s end. But, equal amounts of pundits warn against the unsustainability of such growth. Per MarketWatch, Skybridge Capital founder Anthony Scaramucci called it a "supply and demand situation." One must treat Bitcoin information as an echo chamber; wherever you dig on the internet, you can find evidence supporting your own assertations.
Instead of opinions, context can help articulate just what we’re dealing with here. Taking a closer look at Bitcoin’s growth over the past several years, Senior Market Strategist Chris Prybal gathered data comparing the Bitcoin/Gold growth ratio since 2016. Per the graph below, the ratio peaked in December 2017, just past 15:1. Following a multi-year lull, the ratio saw an unprecedented charge higher, and now stands just shy of 30:1. This represents three times the December 2020 low for the ratio, and a whopping six times the September lows.
Another contextual layer to add when referencing Bitcoin’s recent volatility is volume. In the chart below, Schaeffer’s Senior Market Strategist Matthew Timpane highlighted 2-, 3-, 6-, and 12-month BTC volume close-to-close. Range expansions to and above this (blue dotted) line have typically indicated that large moves lie ahead, with potential for a trend change -- but not necessarily. In fact, when utilizing the chart below, it’s easy to notice that it runs eerily similar to Schaeffer’s Volatility Scorecard (SVS), which measures the size of the equity’s movement on the chart in comparison to what options traders were pricing in during the past 12 months.
As a trader, something you can do to utilize BTC is hedge through futures. The Grayscale Bitcoin Trust (GBTC) does not have options, so you’d need to use a proxy like MicroStrategy (MSTR), Riot Blockchain (RIOT), or Canaan (CAN). Though it’s good to remember the latter two are a bit more tied to mining and servers for BTC. Overstock.com (OSTK) has been a mild proxy too, which was part of Timpane’s thesis behind a Schaeffer’s trade he initiated that closed Friday.
Also worth noting is how Tesla’s (TSLA) CEO Elon Musk switched the company’s balance sheet from cash to Bitcoin, leaving a gaping opportunity for a win/win from a treasury and financial perspective. This is because BTC’s rally is great for the balance sheet, but if the surge doesn’t continue, Musk can write it off against business income. In simpler terms; we are expecting volatility, but we don’t necessarily know which direction it is going to be in, so moving forward with hedging may be your safest bet.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 21.