The recent rally in crypto got me thinking of whether to close for gains now or let it run further. One of the more important developments is the availability of options, which allow us to further calibrate our payoffs.
I still maintain that predicting the mid-term trajectory of crypto is impossible, as I think it is dependent on a critical mass of buyers. The allure of investing in crypto is in its bubble-like returns - that is one thing that people are looking to diversify into (or for new generation investors just starting out, it is the only thing worth looking for).
But we can look at history and glean general characteristics of past bull and bear. Why might this work? Because most people will do just that. There are no fundamentals - just the decisions of the masses in a feedback loop.
Bear markets have generally been a price process reflecting slowly dying hopes and lots of struggle (look at the post-2017 bear - you can almost feel the pain of investors as each upward move gets progressively weaker). This makes for a problem with hedges using Puts, because ideally we want downward moves to be violent and unanticpated in a midst of a calm / uptrend. But uptrends tend to inflate the premiums as well, due to the bubble-like movements. This is different than stock indices where a steady uptrend generally makes premiums cheaper.
Bull markets have generally been exponential runs, but end violently before giving way to the slow downward trend. Given the strength of the current rally and history, I think (a) not much left in this move before the next minor bear, and (b) will not be a violent bear; making hedging a bit problematic because I have to buy a longer dated hedge. Reason why I think it will not be like the first bull (of 2017) is because some people have learnt their lesson, so the bubble will not be as strong as before – I think that the first bubble in any market is the strongest, and then people learn, leading to more tempered expectations, and thus more tempered actions and reactions.
Of course, I can be wrong and perhaps somehow some even more perfect storm of euphoria enables it to surge beyond expectations (again). Which is why I think on balance, the best strategy is to buy some Puts - at least enjoy some upside and it also acts as a Put on your psychological turmoil that is the regret of missing out on a huge beyond-expectations move.
For some reason that I've yet to investigate, crypto futures are trading in contango, making ATM options cheaper for downside protection, which furthers the case for buying Puts.