BitOoda Morning Report — 10/16/19

Good morning. Over the last few weeks in our Volatility commentaries, we have laid out several cases regarding BTC flat price, as well as the BTC volatility curve. Today, we aim to put all those puzzle pieces together to show why our recommendation to buy March $6,000 puts is BitOoda’s recommendation for our mining clients over the next week.

In our 10/1 morning report, we wrote there were 3 likely scenarios for BTC price to react to the break down below the $9,800 support and technical breakdown of the downward sloping triangle formation that had formed and held since late June:

1. Corrective rally to the $9,500-$10,000 level to test the breakout followed by the sell off, to a longer-term support around $7500 or $6000.

2. Failure to retest the breakout would mean complete disarray among the bulls and signal a quick trip to $6000 or even lower.

3. Decisive breakout through $10,000 and a resumption of a rally to new highs.

Price action over the last 2 weeks leads us to believe that scenario #2 could be the likely possible outcome. If that were the case, we would want to protect some portion of future business operations in the form of the hedge mentioned above.

Now on to BTC Vol — in our 10/8 morning report, we wrote, “It has been an uneventful week for BTC since our 10/01/2019 commentary with the market essentially unchanged in the low $8000’s and short-term volatility underperforming after an outsized move.” Other than a small pop in BTC price late last week, we have drifted back to ~$8,000 and remain essentially unchanged. Vol over the week has drifted slightly lower as well.

In last week’s volatility report, we also stated, “We still think March smile will continue to outperform ATM so strangles vs straddles is an appropriate trade. We would focus on .16 delta puts and calls. The wingy (smaller delta) strangles are approaching fair value faster and represent smaller edge.”

We continue to believe the smaller delta options in March are the best bang for your buck, and this view ties back into our recommendation for miners. The March $6,000 puts are ~20 delta options worth around $675 as of writing this piece.

To show an example of how this hedge can protect a small miner, we are going to use $3,500 as a breakeven price for miners’ profitability and running at 30% capacity to “keep the lights on”. In this scenario, purchasing the March $6,000 puts for $675 protects miners’ assets or future rewards starting at $5,325. This price is approximately 150% of the break even, so the hedge should be about 20% (30% divided by 150%) of total mining production. Say a Miner produces 80 BTC/month, which would be a total by March (5 months * 80 BTC) is 400 BTC.

Therefore 400 BTC * 20% = 80 BTC put Options as insurance on bankruptcy of the mining business. The total cost of this is $54k.

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