Ways to Play the Growing Cryptocurrency Craze

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The crypto playing field is about to get crowded

Subscribers to Chart of the Week received this commentary on Sunday, June 9

This past week, Bitcoin (BTC) stalled out at $72,000 in a bid to recapture the $73,805.25 all-time highs from March 14. Fueling this latest run at the major March hurdle are spot Bitcoin exchange-traded funds (ETF), which saw $880 million in inflows on Tuesday, per tracking site Farside. Since their approval in January by the Securities and Exchanges Commission (SEC), these spot ETFs propped up the enigmatic cryptocurrency market, with U.K., Hong Kong, and Australian exchanges following suit and fanning the flames.

On Friday, a better-than-expected jobs report boosted bond yields and poured cold water on the prospect of a dovish Federal Reserve monetary policy, which would have been another bullish indicator for healthy BTC returns this summer heading into fall. Where does this leave the cryptocurrency sector? Some answers – as it always seems to be – can be found from options traders.

But first, Schaeffer’s Senior Equity Analyst Joeseph Hargett offered important context on BTC’s rally regarding its latest ‘halving’ event on April 20, where in an effort to limit total supply and increase scarcity, the amount of new Bitcoin’s gets cut in half every four years. Hargett noted that crypto investors know this event is coming, and subsequently bid up BTC ahead of it to bring in new investors. It explains why BTC is up only 13% since the halving, but is nearly 70% higher in 2024—the rally was already priced in. This makes the April 20 close at $65,500 an important marker as a potentially bearish indicator, and any move past the aforementioned all-time high levels could be considered a waved checkered flag.

While BTC toes the line, options traders are rerouting their attention to Ethereum (ETH), the second-most popular cryptocurrency unique for its dual-use functionality on the blockchain. ETH is up 26% in the last month and 62% higher in 2024, yet options traders keep loading up on puts. On March 30, Ether’s put-call open interest ratio rose to 0.61, the highest in at least a year, according to data source Glassnode. But that’s not necessarily a bearish bet; ETH bulls could be using the puts as a hedge against any additional upside, an outcome that certainly seems to be in the works.

That’s because buzz is building that those spot ETFs that are driving BTC could finally be coming for ETH, with the potential to attract $4 billion of inflows in the first five months, per crypto analytics firm K33 Research. Per the chart curated by Hargett below, note the flag technical formation after consolidation below $3,900. Given how spot ETF’s have propped up BTC lately, momentum on the spot ETH front could shatter that short-term ceiling.

There is downside though. Those spot ETFs don’t trade options, and the individual equities that do list options have ratcheted-up premium at the moment. Coinbase Global (COIN), Marathon Digital (MARA), Riot Blockchain (RIOT), and CleanSpark (CLSK) all sport an implied volatility (IV) of 80% or higher. So while their Schaeffer’s Volatility Index (SVI) might be in the low percentile, the high IV means you must buy in and be right, immediately. With assets as volatile as cryptocurrencies, paying a pretty penny is a risk, even if momentum and bull signals pile up.

Hargett, along with Senior Market Strategist Chris Prybal, have a different option for the pragmatic options trader. Robinhood (HOOD) still exists as a crypto broker, and has a much more palatable IV, along with a host of other enticing technical setups that they unpack in our Schaeffer’s Daily Bulletin. So if you would rather dip your toe in and tail cryptocurrencies without being married to them, crypto-adjacent stocks like HOOD remain an interesting play.

Whatever type of cryptocurrency exposure you’re comfortable with, the playing field is about to get crowded. Per a Bloomberg report, “the next year-and-a-half could see the biggest wave of crypto-related initial public offerings on record,” per Matthew Kennedy, senior market strategist with IPO researcher Renaissance Capital. Kennedy noted as many as 15 crypto companies could go public. So if nothing out there looks enticing enough, give it a few months and circle back.