How to Ride the Bitcoin Halving Wave: Guide for Retail Investors

Key Takeaways

• Understanding the factors driving Bitcoin’s volatility helps investors anticipate and react to price fluctuations.
• It’s essential to recognize the limitations of historical data and the different economic landscape surrounding this halving.
• Learn about Long Iron Condors, Long Straddles, and Long Strangles, three strategies for navigating a neutral market outlook or anticipated price swings.

Once every four years, the Bitcoin (BTC) halving leaves traders buzzing with questions. Will BTC hit an all-time high? How long will the rally last? Will the newfound supply squeeze, met with surging demand, cause prices to accelerate?

While historical data does indicate that the world’s oldest and best-known cryptocurrency could accelerate further, volatility works both ways, and BTC can tumble as fast as it climbs. But understanding this and getting to grips with the derivatives products available on the market today can turn erratic price swings into a compelling opportunity.

Understanding the fluctuations

Whereas central banks are tasked with maintaining the stability of fiat currencies (a task undermined by inflation that erodes their value), Bitcoin has no such authority in place. This contributes to the dramatic movements we see on a daily basis — and 15 years after this digital asset made its debut, we are still in a period of price discovery.

While a 3% move over 24 hours may seem all that significant, this represents thousands of dollars in cash terms. Volatility has subsided to some extent  over the past decade as BTC has matured, but noticeable spikes can still be seen every four years, coinciding with halvings.

Multiple factors drive these fluctuations. Macroeconomic developments, such as interest rate cuts and inflation readings, can have an impact. Rumors and speculation—as seen during the long-awaited run-up to exchange-traded funds based on Bitcoin’s spot price being approved in the U.S.—also play a role.

While there was undoubtedly excitement surrounding past halvings, this isn’t the entire story. When supply was first cut by 50%, in 2012—from 50 BTC to 25 BTC per block—major economies were still in the throes of an aggressive money-printing spree, more formally known as quantitative easing, in the aftermath of a brutal, global financial crisis.

This, when coupled with ultra-low interest rates, made Bitcoin a far more attractive proposition for investors seeking returns. There was a similar story in 2020, as the world grappled with the coronavirus pandemic. The money taps were turned on again as industries ground to a halt, with unprecedented stimulus packages coinciding with a substantial surge in trading activity.

Because of this, you could argue that in two out of three halvings the wider economy had more of a role to play in Bitcoin’s success than the pre-programmed supply shocks did. Past supercycles have lasted about 15 months on average, with a substantial delay between the reduction in block rewards and BTC hitting new all-time highs.

In 2024, things are different. For the first time, BTC actually managed to reach a record price before the halving, rallying by 318% in the 15 months from January 2023 to March 2024. The cryptocurrency has never existed in an environment where interest rates have been this high.

After the U.S. Securities and Exchange Commission allowed BTC ETFs to hit the market, billions of dollars in new capital have flowed in. The question is this: will prices now cool down or is the real bull run just beginning?

Options for the opportunistic trader

With frenzied speculation around the halving reaching its peak, options contracts can be an indispensable tool for navigating the market.

As the name suggests, options give you the opportunity—but not an obligation—to buy or sell BTC at a pre-agreed rate (known as the strike price) on a predetermined date.

Given that options don’t necessarily require an investor to own the underlying asset, in this case Bitcoin, they can also remove barriers to entry. Options contracts can allow traders to capitalize on volatility, irrespective of whether the markets are heading up or down.

A call option means BTC can be acquired at the strike price—and if the cryptocurrency is selling at a higher rate on the spot market, it can then be offloaded for a profit.

Meanwhile, a put option provides a safety net, if the market is in retreat. This is because Bitcoin can be sold at a strike price that’s elevated compared with its current market value.

All considered, this means options contracts are ideal irrespective of whether you have a bullish or bearish view of BTC’s prospects after the halving.

Optimistic traders will argue that the halving, coupled with a strong liquidity environment, makes a long strategy ideal, with options used to gain embedded leverage, without worrying about the prospect of liquidation.

That said, pessimists would maintain that—following a strong start to 2024—the bull run may have already happened. Bitcoin has been prone to “buy the rumor, sell the fact” stories before, and this time around, the likes of JPMorgan are predicting  that this crypto asset could plunge to lows of $42,000, once the supply is cut by 50%.

Of course, not everything is black and white. Bitcoin may not be heading to $1 million anytime soon, but it certainly won’t head to zero. Thankfully, cutting-edge strategies are available for traders who want their bet to cover them in the event of bullish and bearish outcomes.

How is a Long Iron Condor strategy suitable for a neutral market outlook?

Put simply, a Long Iron Condor strategy allows options traders to capitalize on BTC prices moving in either direction, as long as it remains in a certain range before contract expiry.

This is achieved through two put and call options that are closer to BTC’s market rate and another two that are at a rate both much lower and much higher than the spot price.

Ultimately, this is a low-risk strategy ideal for traders who anticipate Bitcoin will continue to trade in a certain window. While the maximum amount that can be lost is determined by the cost of establishing all four positions in the first place, this can reduce the upside on market swings.

There are ways of capitalizing on Bitcoin’s volatility while remaining neutral. For example, a Long Straddle strategy entails establishing a call-and-put position with identical expiration dates and strike prices.

Should a BTC bull run commence, the call option would become more valuable, with profitability that outweighs the loss of the opposing put option. The same would be true in a bearish scenario, as the situation would be reversed, and the put would be more lucrative.

Long Straddles are ideal symmetric strategies when BTC has been in a holding pattern for some time, indicating that a big move one way or another is on the horizon.

Unlike the Long Iron Condor strategy, potential profitability isn’t constrained by Bitcoin remaining in a price range. However, the premiums paid on these options contracts will be more expensive.

Another alternative is the Long Strangle. A key distinction here is that the strike prices are different on the call and put options. This is where a trader anticipates that there will be a significant swing in a particular direction, but wants insurance in the event they are wrong. As a result, it’s an asymmetric strategy that will benefit one outcome over another.

Here, the level where a Long Strangle breaks even is based on whether Bitcoin either reaches the call option’s strike price plus the cost of premiums or falls lower than the put option strike price once premiums are deducted.

Out of the three, the Long Iron Condor strategy is best suited to retail investors because of how less capital needs to be put at risk.

Of course, there are potential downsides to options contracts, and this hinges upon the strike price and expiration time selected by traders. For example, if a month-long call position is established, but a dramatic price swing happens after two months, no upside would be realized.

Beyond options: exploring hedges

Straightforward long and short strategies have simple objectives—you are betting on Bitcoin either rallying or crashing—but there are ways of mitigating losses if the markets aren’t turning in your favor.

For example, protective puts can be an indispensable hedge against a drop in BTC’s value, as it effectively limits the extent to which an investment can fall in the red and protect capital, if the cryptocurrency plunges below a certain value.

Crucially, if Bitcoin continues to rise as hoped, this options contract would have minimal impact on the potential upside beyond the premium paid.

Meanwhile, traders in short positions can eliminate the risk of incurring unlimited losses if BTC rallies by taking out a call option, creating an upper ceiling.

The volatility within the crypto markets can often be intimidating for retail traders, even off-putting. Options contracts allow this exact same volatility to be transformed into a compelling investment strategy, with safeguards in place to prepare for multiple eventualities.

Given how the 2024 halving is dramatically different from the three that came before, planning ahead and battletesting different outcomes is crucial.

The information in this article does not constitute financial advice or a recommendation, and should not be considered as such. 

About the author: Edward Mehrez  is a co-founder of Arrow Markets, pioneering a new paradigm for options trading on the Avalanche blockchain. Arrow offers the efficiency of centralized exchanges with the transparency and security of on-chain settlements. Prior to Arrow, Edward honed his expertise in quantitative finance at MKP. He holds a strong academic foundation with a Bachelor’s degree in Mathematics and Economics from UCLA and a Ph.D. in Economics from Cornell University.

Disclaimer: The views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to CCN, its management, employees, or affiliates. This content is for informational purposes only and should not be considered professional advice.