Dear Student,

As you know, I normally like to answer questions from the mailbag on Fridays before we kick off the weekend…

But I got an email from one of your fellow students yesterday who’s new to cryptocurrencies that I think is important to answer today.

Here it is…

“Hi Tom, I was always scared of jumping into crypto because I never fully understood it and was scared that it was all hype. I’ve been following you for a few months now and am interested in eventually trading it. But right now, I’m just doing my research. So, I was hoping you could help me get a better grip on the difference between mining Bitcoin, buying coins, and trading crypto stocks and options. Thanks!”

First and foremost, I commend you for exercising discipline and taking the time to learn more about crypto before jumping in. One of the worst mistakes investors and traders make early on in their careers (myself included) is putting money down on a trade before knowing what they’re doing. So great job!

Now let’s go through this…

MINING CRYPTO

I was one of those “pioneers” who started mining Bitcoin back in 2013. When mining bitcoins, you’re simply using a special software to solve math problems and are paid bitcoins in return. Nodes (users) add transaction records to Bitcoin’s blockchain. This blockchain is what is used to verify and confirm transactions to the rest of the network.

Bitcoin mining also involves a process called “halving,” which is the tightening of the supply of bitcoins. When things first started, miners were given 50 bitcoins per every block they extracted. This is largely because people weren’t as interested in – or were too skeptical of – buying bitcoins. When demand grew in the early years, that amount got cut in half (25 bitcoins for every block extraction). Fewer coins and higher demand led to higher prices.

Like anyone else who’s invested in this equipment, I was able to stake my claim before websites even allowed the buying or trading of bitcoins. It was ultimately more of a learning experience for me over anything else, but I did end up pocketing a few digital coins before finally selling the machine (my wife complained about the noise and the heat it was giving off from all the processing power).

BUYING COINS

There are plenty of ways to profit on Bitcoin’s meteoric run. Right now, you can buy one coin for $93,482 as of the time of writing – if you have that kind of disposable income. Of course, you can buy a fraction of one coin for any dollar amount you’d like to invest, too. As Bitcoin’s price goes up, so does your investment.

But when things like eggs, beef, and bread are still high, a lot of people don’t have that much money to drop on a single investment (or a fraction of one).

Plus, there’s a lower-cost, lower-risk, AND higher-return way to get in on crypto…

CRYPTO OPTIONS

I like to trade options on crypto stocks —companies in the crypto space that have a high correlation with Bitcoin’s price movement. These aren’t cryptocurrencies, but their prices tend to align with Bitcoin.

One of my go-to “Crypto Stocks” is Riot Platforms Inc. (RIOT), a Bitcoin mining company. RIOT owns a ton of bitcoin, so the stock closely tracks Bitcoin’s price movements, making it ideal for options trading.

At this moment, RIOT is trading at $12.26. Now I know that 12 bucks won’t break the bank for some people, but here’s the thing… Stock prices fluctuate, and buying shares of a stock can get real expensive – real quick. Not to mention, some of the most popular crypto stocks in the market right now can cost you hundreds to thousands of dollars for a single share.

Options, however, let you profit from a pop or drop in the stock for a fraction of the price and greater ROI. If you think the stock will fall, you can use a bearish options play, like a put spread. If you think the stock will rise, you can use a bullish options play, like a call spread.

One of my favorite strategies is selling cash-secured puts. With this, I sell a put option on a stock like RIOT.

This is how it works:

Sell a Put: When you sell a put, you’re giving someone else the right to “put” (or sell) shares to you at the agreed-upon price (the strike price) before the option expires.

Get Paid for the Risk: When I sell a put, I get paid a premium upfront. If the stock stays above the strike price, the option expires worthless, and I keep the premium as profit.

If the stock drops below the strike price, I may have to buy the stock at that price. But that’s OK—I wouldn’t sell a put unless I was willing to own the stock at the strike.

Here’s the example I showed you of how this this strategy works

Right now, you can trade Bitcoin options, but only on non-U.S. exchanges like Binance. For me, trading options outside a regulated U.S. exchange is a no-go. I’m a speculator, but I’m not interested in outright gambling.

So, let’s talk about exchange-traded funds (ETFs)…

CRYPTO ETFS

Before we get into the crypto-specifics, I want to take a minute to revisit the benefits of trading ETFs.

Folks often get caught up in finding the “perfect stock” to trade or invest in. The problem is, there are over 9,000 cryptocurrencies and dozens of crypto-related companies. The biggest names, like Bitcoin and Ethereum, grab the most attention and viewership for financial news outlets… But they’re not the only ones out there worth talking about.

And, as you can imagine, trying to find that so-called perfect stock or perfect trade of over 9,000 options can feel like searching for a needle in a haystack. So, instead of stressing about something that doesn’t exist (what’s right for one investor may be wrong for another), consider focusing on the broader market via an exchange-traded fund (ETF).

ETFs track an index or a basket of stocks/assets in specific industries or sectors, similar to an index fund. They trade just like individual stocks, and you can even trade options on certain ETFs – something I personally love to do.

I love ETFs because they offer diversity and spread out the risk. If one stock in the ETF underperforms, others in the basket can help offset it, making the ETF less vulnerable to a big drop in value compared to holding a single stock. Trading an ETF can be just as straightforward as trading shares of stock, but it gives you much broader exposure.

That’s why the announcement that Bitcoin options will soon be available on a U.S. exchange – specifically, the iShares Bitcoin Trust ETF (IBIT) is such a big deal. It’s a way to profit on Bitcoin without buying and holding. Right now, Bitcoin’s trading at around $89,000, which is a hefty price to build a substantial position.

In the meantime, while we wait for the SEC to give its final approval, I to make sure you’re prepared to profit – especially if you’re new to crypto. And tomorrow, we’ll go through everything you need to know to get started – and to cash in.

Talk soon,

Tom Gentile
America’s Pattern Trader