Author: Bonna | U Yogurt, early investor in Nothing Research·

The bear market is certainly not over,

but if you have invested $1 million in BTC, with a cost of $70,000 (14 coins),

and are afraid of buying at a high price, worrying that it might drop to $50,000,

what would you do at this moment?

Would you reduce your position and wait for the price to drop before buying back? Are you that confident, what if you miss out? Would you directly open a short position for hedging? However, there are funding fees; the longer you hold, the greater the uncertainty of costs, and if you want to maintain higher capital efficiency, you have to worry about liquidation; it doesn't seem like a very worry-free option.

Or maybe check out the predictions in the market?

@Polymarket and @Kalshi also have predictions on what the BTC price will drop to in 2026; or simply go buy a BTC put option at $50,000 on @DeribitOfficial?

My personal conclusion is options.

You have to experience it to know how useful it is. No need to sell coins, no funding costs, no need to time the market. Just think of it as buying insurance.

For this, I took the "Below $50k" option on Kalshi and the BTC $50k put option on Deribit, and manually compared hedging efficiency, which should clearly illustrate why.

1. How much does it differ in payout with the same $52,000 hedge?

For assets like cryptocurrency with public market prices, binary contracts are indeed quite expensive. The YES price for "Below $50k" is at 60¢, and if it wins, you earn 40¢, but if you lose, you lose everything, with a return of 1.67x.

On Deribit, the BTC put option expiring in December 2026 with a strike price of $50k has a mark price of about $3,729 each, with a delta of -0.16, which is deep out of the money and much cheaper. Covering an exposure of 14 BTC costs about $52,000.

Assuming you spend $52,000 on both the prediction market and the put option:

Kalshi "Below $50k": $52,000 ÷ $0.60 = 86,667 contracts, winning $1 each; Deribit Dec 2026 BTC $50k Put: $52,000 ÷ $3,729 = about 14 contracts

- BTC $45k: the put option pays $70,000, Kalshi pays $86,667

- BTC $40k: the put option pays $140,000, Kalshi still $34,667

- BTC $30k: the put option pays $280,000, Kalshi still $34,667

- BTC $20k: the put option pays $420,000, Kalshi still $34,667

When BTC just dropped below $50k, Kalshi's payout was actually slightly higher. But as soon as it drops further, the put option quickly crushes it. And if you want to fully cover a $300,000 loss if BTC drops below $50k using Kalshi? You would need to buy 750,000 contracts, costing $450,000. The cost difference is huge.

2. The flexibility of mid-term trading options is not weaker than prediction markets

Of course, in practice, no one actually waits until December 25 to settle. Both tools can exit mid-term, but the profit structure at exit is quite different.

The prediction market does have an advantage here; the bet on "How low will Bitcoin get this year" resembles the logic of American options, which is friendlier to buyers. Any time this year, if BTC drops below $50k, you win, even if it later rebounds to $80k, the YES side still wins.

However, most BTC options are European-style, only looking at the price on the expiration date. If it drops before but rebounds by the expiration date, you won't get a penny from exercising the option. But this is only a limitation for exercising. You can sell it in the secondary market at any time. Also, the profit from selling mid-term is actually not bad.

During a sharp drop in BTC, your put options will surge in value for two reasons:

1) Delta changes

Delta measures how much your put option increases for every $1 drop in BTC. When you buy, it's deep out of the money: BTC needs to drop from $71k to $50k for it to have intrinsic value. The market thinks the probability is low, so Delta is -0.16, meaning it is not very sensitive to BTC fluctuations. But when BTC actually begins to drop towards $50k, the market realizes this put option is becoming increasingly likely to be in the money, and Delta can quickly rise from -0.16 to -0.5 or even higher.

2) Implied Volatility (IV) spikes

The price of options depends not only on how far BTC is from the strike price but also on the market's expectation of future volatility, which is implied volatility (IV). You can think of it as a "fear index": the more people believe the market will explode, the more expensive the options become. Moreover, usually, when the market is experiencing massive upward or downward movements, it reinforces everyone's expectations for IV to keep rising.

When BTC is stabilizing around $70k, the market is relatively calm, and IV is low, at 51%, making options cheap. But once BTC starts to plummet, panic spreads, and everyone wants to buy put options to protect themselves. Demand surges, and IV skyrockets to 80-100%; just the volatility component can double the price of your options.

At this point, you can choose to sell the options to realize some profits, thereby hedging against losses in your BTC positions, and reinvest this profit into BTC for more BTC. This entire process does not require selling a single BTC, nor does it require very precise timing, which is not possible with reducing positions or opening shorts.

Of course, to fully hedge, you need to maintain a delta-neutral strategy, continuously adjusting your options position, but for most people, I think this is unnecessary. It's just like how hard it is to buy at the bottom; as long as there is a drop, having some profit to offset losses is psychologically sufficient.

3. Irreplaceable aspects of the prediction market

Of course, the prediction market is not completely useless in the hedging domain.

For assets with public market prices, the hedging efficiency of options indeed crushes that of the prediction market. The core reason is simple: your losses are linear, and your hedging tool should also be linear. A binary payout used to hedge linear losses is structurally misaligned.

For those events without corresponding public market prices or options markets, you can only rely on prediction markets. For instance, many political and macroeconomic events clearly have a huge impact on your portfolio, but you can't buy a single option to hedge against them.

In such scenarios, the prediction market becomes the only tool available.

You at least have a channel to express opinions and manage risks.

So, the prediction market and options are more complementary.

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