How to Profit During the Crypto Bear Market

Crypto Challenges

Bitcoin and other cryptocurrencies, including Ethereum and Solana, have plummeted since the beginning of the year. Bitcoin was trading near $50,000 at the end of 2021 and is currently trading around $21,000.

Cryptocurrency has been going through many challenges like rising interest rates, recessions and tighter government regulations. Many governments are trying to raise taxes on crypto, with others like China banning it all together.

You can use inverse ETFs, buy put options and short sell crypto-backed funds to profit during the crypto bear market. 

Use Inverse ETFs

Unlike ETFs, inverse ETFs  don’t own underlying assets like stocks or bonds but instead have options, futures and swaps contracts on those holdings. If you buy an inverse ETF on the S&P 500, then you’d profit if the S&P 500 decreased. Inverse ETFs decay over time because of their derivative-based structure, making them more suitable for short-term trading.

Canada-based Horizons ETF has launched BetaPro Inverse Bitcoin ETF on the Toronto stock exchange (TSE: BITI.U). ProShares, the same company behind the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO), has recently created its own inverse ETF, (NYSE: BITI).

These ETFs trade bitcoin futures on the Chicago Mercantile Exchange (CME) with standard ETFs buying long contracts and Inverse ETFs entering in short contracts. BITI.U is trading around $18, which is an approximate 50% gain from its initial price of $12.66 back in April 2022.

Buy Put Options on Bitcoin

A put option lets a buyer sell a certain asset like a stock or cryptocurrency at a defined price called the strike price. The put buyer pays the seller a fee, or the premium, to have the right, but not the obligation to sell an asset at the strike price.

So, if you buy Bitcoin puts that have a strike price of $19,000 with a premium of $1,000, then you’re paying $1,000 to lock in the sales price of $19,000. 

You’d profit with this trade if Bitcoin dropped below $19,000 with your profits being greater with a steeper price decline. Your maximum profit with this trade would be strike price less the current Bitcoin price minus any premiums paid.

You can use the CME Group to find options quotes and trade options on Bitcoin and other assets.

Short Sell Bitcoin Securities

With standard inverse ETFs and put options, the most you could lose is your initial investment. But, if you want higher gains with more risk, then short selling is a strategy to consider.

Short selling refers to selling an asset like a stock or Bitcoin at a higher price only to buy it back at a lower price. If the underlying asset’s price greatly increases, then you’d have significant losses since you’d have to buy it back at a higher price.

The biggest risk of short selling is that it uses margin, which can leave you owning more than what you invested, depending on the price increase. You can Binance to create a margin account to short Bitcoin, or you could short sell other Bitcoin based assets like the Grayscale Bitcoin Trust (OTCMKTS: GBTC).

Bottom Line

Cryptocurrencies like Bitcoin and Ethereum have been among the fastest-growing asset classes in history. Just a decade ago, Bitcoin was trading for around $10, while Ethereum was trading near $130 back in March 2020.

They’ve had massive price increases since then but have also seen staggering losses. Rising interest rates and increasing government regulation are some of the biggest reasons behind the current crypto bear market. 

Despite the bear market, inverse ETFs, put options and short selling can be profitable plays. While these strategies offer high profit potential, they carry higher risk, so invest with caution.