The cryptocurrency market is developing, giving investors a choice of more and more different cryptocurrencies and tokens issued by companies. However, most of them carry a huge risk, which investors accept in order to earn more than the market on average. Often the results of such experiments threaten investors with impressive losses. In this article, we want to explain how it is possible to invest in a proven cryptocurrency like Bitcoin and to get a return of up to 3 times the growth of Bitcoin itself.

To build the portfolio, we will use Bitcoin and reverse parimutuel options on Bitcoin. Today, the Bitcoin rate is $ 8,700 per BTC. We also assume that the reader is already familiar with the previous articles on reverse parimutuel (theoretical article, practical article).

Strategy

The following method is used today by so-called ulta funds (a class of hedge funds that use derivatives). However, because the cryptocurrency market is so young, this approach could not be realized. With the advent of reverse parimutuel options, this becomes possible.

Let’s suppose our portfolio consists of 1 Bitcoin and, as we saw in the last article, in cases of growth or decline, the value of our portfolio changes proportionally to the price of Bitcoin (1:1). So, how are we going to earn up to 3 times more and not lose everything?

Option Premium Calculation

The secret lies in the inclusion of options in the portfolio. From the calculations, we see that the cost of a 3-month call option with an $8,500 strike and an upper limit of $11,500 is $ 315 or 3.7% of the Bitcoin price. To implement this strategy, we need to sell part of Bitcoin in the amount equal to the cost of two premiums for this option. As a result, 0.926 BTC will remain in our portfolio. We use the rest to buy the two call options. Our final portfolio will look like this:

Qty Asset

0.926 BTC

2 Option Call

(Where RP — reverse pariutuel call)

Now, let us consider the behavior of our portfolio, based on the price movement of Bitcoin. Portfolio 1 consisting of 1 Bitcoin fluctuates in proportion of 1:1 to the rate of BTC/USD and Portfolio 2, which includes options, fluctuates according to the following formula: (0.926 BTC + 2 * P & L Call).

Portfolio 1 vs Portfolio 2

From the table, we see that if the price of Bitcoin grows to $11,500, the first portfolio will earn $3,000, and the second portfolio will earn $8,147, which is 2.71 times more than the result of portfolio 1.

Now consider a negative result — what will happen if the price goes lower? If BTC drops by $2,500, then portfolio 1 will lose $2,500, but portfolio 2 will lose $2,945, which is 1.17 times more than portfolio 1. That indicates that losses in a declining market are much lower than the profit in a rising market.

In the graph below, we can analyze the risk profile of both portfolios, and as we see in case of growth and decline, their behavior is different.

P&L of Portfolio 1 and Portfolio 2

Portfolio 1 behaves proportionally to the entire X axis, but dependence of portfolio 2 on the price of Bitcoin decreases if the rate goes below the strike price.

Conclusion

We considered a strategy that allows you to extract profits up to 3 times the growth of the asset itself, while maintaining risk at an acceptable level and having control over it. The risk was the cost of two premiums paid for the call options. However, at the same time, there was also 0.926 Bitcoin in the portfolio. Such a strategy behaves excellently in a growing market and provides for full control over losses in a declining one.

The ability to implement simple but interesting and profitable strategies in the crypto-currency market will give a new impetus to its development.

We invite you to participate in the creation of a new tool for the crypto-currency market called reverse parimutuel options.

Our project: cryptowergame.com