[Archive - 05/15/2018] Double Dip Bitcoin Interest Trade
Note 01/26/22: My naïve past self forgot to mention, nothing is financial advice! This trade would have worked gloriously over May 2018-Mar 2020 but the call selling into the 2020-2021 bull run likely caused it to lose some deltas on the way up and underperform exclusively lending.
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Double Dip Bitcoin Interest Trade
With LedgerX recently launching a simple way to sell covered calls on Bitcoin and a growing demand for short-interest on Bitcoin spot, I propose a great way for long term Bitcoin holders to earn interest on their inventory.
Loan out Bitcoin over a fixed term for interest in Bitcoin and and sell upside calls on Bitcoin that expire as close as possible to the days after the loan is repaid.
For example, I loan 100 Bitcoin today, May 15th, for 6 months at 10% over the term, receiving 110 Bitcoin on November 15th. I also sell the $50,000 LedgerX call that expires November 16th (or as close as possible to after the 15th) for $1000 per call on my initial inventory of 100 BTC.
Come November 16th, if Bitcoin is trading below $50,000 — I have earned $100,000 from selling the calls which are expiring out of the money and 10 BTC from the spot loan. I can keep doing this over and over, earning interest in Bitcoin from the spot loan and USD from the covered calls. If Bitcoin is trading above $50,000, I have locked in my gains on the 100 BTC when the call is exercised and I get to keep the 10 BTC from interest.
The major risk is the disaster scenario when the lender defaults AND the calls expire in the money, meaning I owe a bunch of Bitcoin that I don’t have. As long as the loan is principally brokered through a reputable firm and the call strike is at satisfactory upside, the risk is very manageable.