Advantage in a Bull Market: Why the F.M. Strategy Outperforms Traditional BTC Investment Methods

The cryptocurrency market is known for its high volatility. On one hand, this provides investors with the opportunity to earn profits, but on the other, it increases risks. Over the past few years, the price of Bitcoin has fluctuated significantly: from its peak of $64,000 in 2021, it dropped to $20,000, and then rose again to $30,000 in 2023. In such conditions, traditional strategies may prove insufficiently effective.

Option strategies help diversify a portfolio. One example is the F.M. strategy, which has roots in the traditional market. Denis Slabakov, CEO of New Mining, explains how the F.M. strategy works, how it helps quickly return to the break-even point during downturns, and how it can earn more during growth than simply holding Bitcoin.

Option Strategies in the Stock Market

Option strategies allow investors to earn premiums regardless of whether the market is stagnant or growing. This is relevant for both traditional and cryptocurrency markets.

The simplest example is the buying and selling of put options. Declines in indices in developed markets (such as the U.S.) rarely last long. By selling a put during a downtrend, an investor either earns a return without investing in the underlying asset or buys the asset at a price below market value. This strategy is usually not packaged in an ETF and does not require external management, but it helps reduce risks during downturns, which is why thousands of investors use it.

For more complex strategies popular in the stock market that operate on the same principle as selling put options, we can consider several ETFs:

- Global X Nasdaq 100 Covered Call ETF (QYLD): This ETF is based on selling call options on the Nasdaq 100 index. Investors earn premiums from sold options, allowing them to generate income in a stable market. However, in the event of a significant index rise, potential profit is limited to the premium from selling call options.

- Horizons S&P 500 Covered Call ETF (HSPX): HSPX uses a strategy of selling call options on the S&P 500 index. This allows investors to receive steady income, but as with QYLD, significant index growth does not lead to a proportional increase in returns due to the limitations associated with sold call options.

- Amplify BlackSwan Growth & Treasury Core ETF (SWAN): This strategy is based on a combination of investments in U.S. Treasury bonds and long put options on the S&P 500 index to protect against market declines. This approach provides a high degree of capital protection and is suitable for conservative investors.

- WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW): PUTW focuses on a strategy of selling put options on the S&P 500 index. This ETF helps generate income in a stable market and limits losses during downturns.

These strategies impose artificial limits not only on market declines but also on its growth. For example, if the underlying asset rises by 30%, the investor may only expect a return of 25%.

However, over several years, the market fluctuates—growth is followed by decline, and limiting drawdowns helps ensure profit over the long term.

It's important to note that options are complex financial instruments, and understanding their nuances is crucial. For example, options have an expiration date, after which they become worthless—they cannot be bought or sold. Additionally, it's important to consider market conditions and volatility at the time of purchase. Therefore, more complex strategies than simply selling put options are often packaged in ETFs managed by professionals.

How the F.M. Strategy Works

F.M. is an interpolation of traditional market experience to cryptocurrency, considering its volatility and relatively higher risks compared to the stock market.

The strategy is based on operations with call and put options, and returns are generated by the price difference between buying and selling.

A put option gives the buyer the right to sell a certain amount of the underlying asset (stocks or cryptocurrency) at a specific price within a certain period. A call option is the opposite contract that gives the buyer the right to purchase the asset at a predetermined price at a specific time. If an investor believes that the price of Bitcoin will rise, they can buy a call option; if they predict it will fall, they can buy a put option.

Depending on the market situation, the investor buys and sells a specific set of options each month. If the previous month's trend continues, the same set of options is purchased; if the market quickly reverses and moves in the opposite direction, new options are selected. The options are chosen to limit the maximum loss to 15% and the gain to 25%.

Efficiency and Profitability

To illustrate how the F.M. strategy works, let's consider a comparative analysis of options and simple Bitcoin buy/sell (HOLD) over the past four years. For convenience, the starting investment is set at $1,000:

In 2020–2021, the returns of the strategies were comparable, but the bearish trend at the end of 2021 led to a divergence between the approaches—since then, the option strategy has shown better results. Over four years, HOLD yielded a return of 60% (from $1,000 to $6,500), while F.M. increased by 110% to $22,000.

If we consider a downtrend, the ratio of the two strategies under the same conditions looks like this:

The chart shows that from the peak in 2021 to the bottom in early 2023, the loss in the HOLD strategy was 70%, while in F.M. it was 40%. Additionally, the break-even point was reached in May 2023 for F.M., while HOLD only recovered a year later, in May 2024.

The difference can be explained by the fact that the decline in F.M. is limited to 15%, while HOLD directly depends on Bitcoin's value. If the market first drops by 40% and then another 20% (as happened in 2022), options fall only by 15%. If the market drops by 15% and then rebounds by 5%, the options regain the same 5%, while the base asset's return remains zero.

Although the growth in F.M. is limited to 25%, the chart of the uptrend in 2023–2024 shows that over the year, due to market fluctuations, the strategy yields 20% higher returns than HOLD:

The above chart shows that growth is uneven. When buying Bitcoin, the investor goes through all the downturns along with the market, while options allow for growth from higher levels. This explains the difference in returns.

Risks

The F.M. strategy significantly reduces risks associated with cryptocurrency market volatility. During the bearish trend from 2021 to 2023, when Bitcoin lost up to 60% of its value, the F.M. strategy reduced losses to 40%.

However, the strategy requires professional management and analysis. It's not an automated algorithm that can be entrusted to a robot, and there are no specific recommendations on which options to buy and when. Moreover, the price of options changes several times a day, and predicting these changes is difficult with little investment experience.

The strategy assumes that the manager makes informed decisions about buying and selling options each month, considering current market conditions. Since decisions are based on analysis, this creates the risk of human error.

Another risk is dealing with the options themselves. They are bought and sold on specific platforms, and something may go wrong, such as technical issues preventing timely sale or platform closures. On the other hand, the options market situation could change, affecting demand.

This risk can be mitigated by trading on major platforms that do not experience liquidity problems, such as Interactive Brokers or Deribit.

From this perspective, F.M. is riskier than simply buying Bitcoin, storing it in a wallet, and waiting for favorable market conditions. However, in the investment world, high returns do not come without risk—the choice of strategy entirely depends on the investor's risk tolerance.

Conclusion

The F.M. strategy helps hedge against market declines and return to the break-even point faster in a downtrend. Although F.M. may not keep up with the market in a bull trend, it shows higher returns than traditional HOLD over the long term.

Despite all its advantages, it is a less conservative strategy than simply holding Bitcoin: in addition to the risk associated with cryptocurrency, the investor takes on the risk of options trading.

Risk can be reduced by diversifying strategies—for example, part of the money can be invested in Bitcoin, and part in F.M.

Another option is to set stop-loss orders that automatically sell the option when a certain price is reached. This tool helps limit potential losses and prevent emotional decisions during market turbulence.