Better than Bitcoin? 5 higher-return ways to trade Bitcoin
11/27/2024 21:16
Here’s how to generate higher returns playing Bitcoin than actually buying Bitcoin.
Bitcoin has been flying high recently, and the token has recently been flirting with the $100,000 level after setting new all-time highs. Those are heady gains to be sure, but traders actually have ways to play Bitcoin that can earn them even higher profits than just owning Bitcoin directly. These methods present greater risk, but they do offer much higher potential returns in exchange.
Here’s how to generate higher returns playing Bitcoin than actually buying Bitcoin.
Bitcoin has a long history of volatile returns, but the price gains over time have been undeniable. It’s been “up and to the right,” despite some massive declines from time to time. While traders can still purchase Bitcoin from a crypto exchange, it’s now possible to wager on Bitcoin’s rise and potentially generate even higher — but more volatile — returns in a variety of other ways.
Early 2024 saw the arrival of spot Bitcoin exchange-traded funds (ETFs), allowing traders to own Bitcoin through a fund rather than directly through a crypto exchange. The funds match the crypto’s performance one for one, so if Bitcoin rises 10 percent, so does the fund. With the best online brokers charging no commissions on ETF trades and the low expense ratios of the Bitcoin ETFs, the funds are a great way to own and trade the cryptocurrency.
But traders now have the ability to trade options on those Bitcoin ETFs, as options began rolling out on the funds in November 2024. Options give traders a more leveraged way to ride Bitcoin’s price increase, offering potentially faster gains than owning it directly if the coin price rises. Traders can also sell options for income, and generate returns from the coin’s notorious volatility.
Drawbacks: Options offer leverage, but the potential for magnified gains also comes with the risk of magnified losses. You’re adding leverage on top of an already-volatile cryptocurrency.
While futures may be more associated with commodities such as oil, corn and pork bellies, they also allow traders to purchase Bitcoin and Ethereum, the world’s second-largest cryptocurrency.
Bitcoin futures also give traders leverage on the price of Bitcoin, allowing them to put up only a portion of the full purchase price as margin and accelerate their returns if the token rises. With futures, you’ll pay a small fraction of the contract’s full value to open the position. If Bitcoin rises, your position also rises, but it will move up even faster because you’ve invested only part of the contract’s value. But this leverage cuts both ways, and can accelerate losses, too.
Drawbacks: Leverage cuts both ways, and if Bitcoin starts to fall, you’ll need to put up cash to hold the futures position or otherwise close it. Again, it’s leverage on top of Bitcoin’s volatility.
MicroStrategy (MSTR) is a publicly traded company that has purchased substantial amounts of Bitcoin since 2020, and it offers a way to play the rise of Bitcoin. As of late November, the company held 386,700 bitcoins, paying an average price of $56,761 per coin. Recently, it has been borrowing money (using convertible bonds paying 0 percent interest) to purchase the coin.
MicroStrategy stock went on a massive run in 2024, and at one point was up more than 700 percent for the year. Traders are using the stock as a Bitcoin proxy, even though it’s worth more than the sum of its Bitcoin stash. The momentum could continue if the company can keep borrowing money to purchase tokens and the price of Bitcoin keeps moving even higher.
Drawbacks: Traders are paying more for MicroStrategy stock than the underlying coins are worth, so traders need a spiral in which the company can keep issuing more convertible debt to buy more bitcoins. MicroStrategy is also leveraged on top of Bitcoin’s volatility.
If MicroStrategy’s volatility and returns aren’t enough, you can also trade options on the stock. You can use advanced strategies such as a synthetic long to avoid putting up any money and then your returns will approximate Bitcoin’s return, though you hadn’t invested any capital, offering the potential for literally infinite returns. Or you could choose to profit on the stock’s volatility by selling calls or puts, generating income in the process. The best brokers for options trading can offer favorable prices and help you evaluate your trades.
Drawbacks: Options on MicroStrategy can move even faster than the stock does, adding leverage on top of leverage on top of Bitcoin’s volatility. Options can quickly become worthless.
If all that action isn’t enough, you can buy funds that attempt to provide two or three times the daily gain of MicroStrategy. For example, the Defiance Daily Target 2X Long MSTR ETF (MSTX) uses derivatives to try to offer two times the daily performance of MicroStrategy. If MicroStrategy rises 10 percent in a day, the fund should rise 20 percent, but these funds can have huge “tracking error” — they don’t perfectly track their target — because of the way they’re structured.
If even that isn’t enough, you can trade options on some of these leveraged funds, giving you leverage on top of leverage on top of leverage.
Drawbacks: A leveraged fund adds even more leverage to an investment that is itself leveraged and betting on the highly volatile Bitcoin. It’s leverage all the way down.
These leveraged trades pile leverage on top of leverage, adding incalculable levels of risk to what is already a highly risky trade in Bitcoin itself. If the trade works — if Bitcoin rises — the trade could work phenomenally, like a whip that accelerates into an ear-splitting crack. Those levels of risk could accelerate into massive returns quickly — or totally wipe out an investment in days or even hours. So these leveraged trades aren’t for the fainthearted or those who need their money.
It’s also important to understand that Bitcoin itself is highly risky despite its eye-popping returns. Bitcoin is not backed by the assets or cash flow of an underlying entity, as a stock is. That means its returns are determined entirely by what the next trader will pay for it, exhibiting what experts call “the greater fool theory of investing.” While Bitcoin is less risky than the other trades on this list, that doesn’t mean it’s safe. So traders should only use money they can afford to lose.
If you’re participating in highly leveraged trades such as these, it’s important to understand they’re lottery tickets. You might win sometimes, but your chances of striking it big are low.
Bitcoin is highly volatile and risky, but the trades above can magnify its aggressive moves at the risk of losing it all if the cryptocurrency heads down. Anyone trading these products needs to be comfortable with losing it all and potentially even more than that if they’re using options.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.