How to resist the risk of cryptocurrency decline
Investing in cryptocurrencies is a high-risk trading business.
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Cryptocurrency hedging is a method that involves strategically opening trades to offset a losing position by changing the value of other positions.
Normally, investors should reduce trading positions or close positions in uncertain situations to reduce risk. However, hedging is a useful strategy in which investors can use neutral exposure to maintain their original cryptocurrency holdings.
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Precautions for hedging cryptocurrency trading risks
In order to avoid the risks of cryptocurrency trading, the following points should be considered first:
1. Diversified investment
Diversification is all about maintaining a healthy portfolio and is a common way to reduce risk in cryptocurrency trading in the market. In the stock market, there are many listed companies in different industries, so it is easier to choose offset stocks according to the industry they are in. But in the cryptocurrency market, most trading pairs are very volatile, and the market usually has a common trend on a daily basis.
2. Liquidity
2. Liquidity
The second is to open an account with an exchange that allows fiat currency transactions. This allows money to be moved between fiat and digital currencies and helps reduce the risk of getting stuck in the event of a major crash.
3. Options and futures
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1. Short sale
Short selling is the act of holding a position and selling an asset. Investors predict that the value of the currency will fall, sell high and buy low, and profit from it. Short selling is a common way for Bitcoin to hedge against long-term risk.
The traditional method of short selling involves borrowing cryptocurrency from a broker or third party and selling it on the open market. There are some cryptocurrency exchanges that allow short selling, but it is often difficult to find a third party willing to lend the asset. Even if they find a lender, they will always get their assets back.
For example, if we borrow Bitcoin to go short when the market price is $8,500. But instead of falling, the price rose to $10,500. Then we bought Bitcoin and lost $2,000.
2. Diversified investment
Hedging of diversified investments is achieved by gradually fixing profits and replacing asset portfolios. Assets should be inversely proportional to the price of a particular cryptocurrency.
For example, DigixDAO (DGD) has an inverse relationship with Bitcoin.
3. Margin trading
Margin trading is a way of trading with borrowed funds. Traders can borrow bitcoins from the exchange and sell them. Profit if the price of Bitcoin falls, making margin trading a hedging tool. The deal is for cryptocurrency investors worried about shrinking their portfolios, and it works well with Bitcoin. When the expected price falls, a new short position is opened, thus cutting losses while investors can gradually sell their cryptocurrency for USD. At present, most of the large exchanges have the function option of margin trading.
4. Conditional order
This method of hedging allows calculating the maximum loss percentage of the portfolio with maximum precision. However, this method has a big disadvantage, it requires assets to be stored in a platform account.
By knowing the current price of an asset, investors can set the maximum withdrawal price allowed to establish conditional orders. Then, when the specified asset falls to a set level, it will sell the asset identified by the investor on the market.
Despite the existence of many trading platforms, the cryptocurrency market is still in its infancy and liquidity remains low, which often makes hedging difficult. In addition, most countries and regions in the world have not licensed and shipped cryptocurrencies, and not all platforms that provide encrypted derivatives transactions have licenses.
5. Hedging
Options in the cryptocurrency space are new and limited. Deribit & Bitmex are currently offering this opportunity. Because of their extensive experience, they explain the basic mechanics of options.
Hedging with options is complex and there are various ways to increase your returns. However, there is a straightforward way to hedge downside risk:
Need to open an account with the exchange
According to the current price of BTC, the preset hedging period
Based on the selected ITM put option price, check its current price and calculate the amount that needs to be deposited
Deposit funds to an exchange
Buy put options and hold to expiration
6. Perpetual contracts
Perpetual contracts have become increasingly popular, and crypto exchanges are starting to offer them.
The first exchange to offer perpetual contracts is Bitmex, and they explain how it works in detail. In this function, investors need to have a deep understanding, because calculating the funding fee is a complicated process.
Ultimately, strategies for using these tools depend on individual solutions to hedging dilemmas. However, it is not easy to sell large amounts of cryptocurrency without spreading panic in the market. So another option is to build hedges to reduce your overall risk over a longer period of time.
OrderBit Digital Asset Management
OrderBit is committed to quantitative trading research and strategy development based on big data research and judgment, and also provides digital asset investment consulting advice for high-net-worth clients and institutional clients. Clients currently serving include digital asset exchanges, mine owners, wealth management institutions and family offices.
