Thursday, May 12, 2022

How To Hedge Your Crypto Portfolio

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Lets Talk About Whether Crypto Is A Hedge Against Currency Devaluation

How to HEDGE your cryptocurrency portfolio during a downtrend! (margin, futures, options, etc.)

TL DR:

  • Currency devaluation is when a countrys monetary authority deliberately adjusts the official exchange rate, reducing the currency’s value.

  • This deliberate action attracts foreign business investment because of the lower costs of doing business within that country.

  • Increased capital inflows spur economic growth but can lead to inflation.

  • Traditional hedges to offset inflation impacts resulting from devaluations have included real estate investment, ETFs, gold, silver, and other commodities.

  • Crypto is an emerging asset class as a hedge, providing some protection for currency devaluation, liquidity and convenience.

  • Crypto adoption is still growing, and until it stabilizes, there can be volatility and uncertainty along the way. Always perform your own due diligence before investing.

Whether we realize it or not, globalization touches us all.

In this cross-border world, countries must regularly reassess how international trade impacts their own economies so that a healthy balance and equilibrium can be maintained to protect their own citizens.

In achieving this balance, governments often deploy a monetary policy tool known as currency devaluation. But what exactly is this and how does it work? In this piece, we explore everything from what currency devaluation is to the effects and impacts of a devaluation. Lastly, we discuss what you can do as an investor to best protect yourself during these challenging times.

Storing Property And Defi Cowl

Some of the vital facets of defending crypto pertains to storage. Its essential to make use of the correct of pockets and safeguard non-public keys. Chilly wallets reminiscent of wallets are advisable for important parts of funds, whereas scorching wallets reminiscent of MetaMask are typically not thought-about one of the best place to retailer crypto.

Whereas buyers usually lock property reminiscent of ETH in good contracts to leverage DeFi alternatives, there are methods to get safety in opposition to hacks and different dangers. Tasks reminiscent of Nexus Mutual, which resembles insurance coverage for DeFi, provide methods to hedge threat on crypto portfolios by promoting cowl in opposition to change hacks or good contract bugs.

Implied Volatility Estimation Of Bitcoin Options

Options traders use implied volatility as a measure of the markets opinion of the stocks potential moves as it provides an informationally superior forecast compared to historical volatility. In addition, it has the capacity to outperform many historical price volatility models . In fact, options are often quoted in terms of implied volatility rather than the price . Thus, implied volatility estimation and analysis can be crucial in selecting appropriate strategies because the wrong implied volatility figures extracted from the right market prices could eventually turn into losses of several magnitudes .

The option pricing literature highlights the significance of the option pricing model that is, relation between the price of an option and the underlying asset price, volatility, and other parameters that influence options process . It further demonstrates the use of historical stock price data to estimate the volatility parameter, which can then be plugged into the option pricing formula to derive options values. Poon and Granger illustrates that a backward induction technique can be used with the BlackScholes option pricing model to derive \ , which the market uses as an input, given that S , K ,r , and \ are observable once the market produces a price for the option. This volatility estimate is called the options implied volatility.

where c is an option pricing formula, \ is the volatility parameter, and \ is the observed market price of the option.

Recommended Reading: How To Get Started With Crypto

How To Construct It

What you need:

  • An account with Deribit

The steps to construct this is similar to using futures with a much easier time to monitor/manage :

  • Based upon the current price of bitcoin and your expected hedging time frame look for the closest in the money put option:
  • For example if BTC is at 6432 and you want to hold it until the end of the quarter then look at the 6500 put option pricing for end of the current quarter. If there isnt one that matches your time frame then go for the longer dated one e.g. if you want to hedge for 2 months then look for the one that is quarterly and covers your timeframe.
  • For your chosen ITM put option price check its current price and calculate how much funds you would need to have to deposit to own enough for 1:1 coverage of your BTC holdings.
  • Deposit the funds into the exchange .
  • Purchase the put option and hold it until expiration
  • A Information To Hedging In Crypto

    Beginner

    Many cryptocurrencies have hit new all-time highs in current weeks, whereas buying and selling volumes have been hovering all year long. The crypto house is experiencing its greatest bull run so far, and whereas many consider that the cycle may proceed for a minimum of a couple of extra months, the markets future strikes are unattainable to foretell.

    Throughout market peaks, optimism can have an effect on rational choice making. Traders could also be tempted to double down with leverage or neglect threat administration methods as costs enhance, which may have dramatic penalties throughout a downturn.

    Cryptos HODL mindset, which advocates for holding onto all investments with out ever promoting, will not be the optimum technique for everybody. For many who need to succeed within the crypto market, there are a number of tried-and-tested methods that can be utilized to hedge portfolios.

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    Storing Belongings And Defi Cowl

    One of the crucial essential features of defending crypto pertains to storage. Its essential to make use of the correct of pockets and safeguard non-public keys. Chilly wallets akin to wallets are beneficial for vital parts of funds, whereas sizzling wallets akin to MetaMask are usually not thought of one of the best place to retailer crypto.

    Whereas buyers typically lock property akin to ETH in sensible contracts to leverage DeFi alternatives, there are methods to get safety in opposition to hacks and different dangers. Initiatives akin to Nexus Mutual, which resembles insurance coverage for DeFi, provide methods to hedge threat on crypto portfolios by promoting cowl in opposition to trade hacks or sensible contract bugs.

    Types Of Cryptocurrency Risks

    Much like the forex market, the cryptocurrency market possesses similar forms of risks: volatility risks, regulatory risks, transactional risks, and leverage risks.

    Cryptocurrency risks generally emanate from the volatile nature of these currencies. Trading in crypto is mainly speculative. Therefore, you must understand these risks before you start trading.

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    How To Construct This

    • An account with an exchange that can short sell e.g. Bitfinex, Kraken
    • USD for maintaining margin in your account

    Steps to construct this :

  • Deposit in your USD into the exchange that can short sell .
  • Note the amount of USD you should deposit will depend upon the margin requirement of the exchange you use and also your tolerance for risk.
  • Put on a short position into the cryptocurrency that you want to hedge for at 1:1 ratio. For example if you hold 10 BTC and you want to hedge it, short 10 BTC equivalent.
  • Monitor your short positions profit and loss so that if you are getting close to your margin call, you will need to deposit more USD or cryptocurrency into the exchange to maintain your short position.
  • Note depositing into the exchanges can take time and since crypto markets can be very volatile, best to not cut it to close before topping up.
  • Close out your short positions whenever you wish to close out your hedge.
  • Why Do Countries Deliberately Devalue Their Currency

    Hedging Bitcoin with Futures – How to Protect Your Long Term Crypto Investments During a Downturn

    It may sound odd but a strong currency does not necessarily work in the best interests of a country or its people. While a strong currency at home means that ones purchasing power is greater abroad, the reverse is true for everyone else outside of that country.

    Alternatively, while a weaker domestic currency would mean that everything abroad becomes more expensive for its local residents , the country would actually become more economically competitive. Foreign businesses would view these countries to be cost-effective in doing business, and such nations would be viewed more desirably in terms of increasing foreign investments within their borders. Such inflows of capital would spur economic growth by creating new jobs, increasing exports, and bringing even more money into the local economies.

    Additionally, while devaluation may reduce the local populations purchasing power abroad, the side effect of that is that residents are more inclined to purchase within their own borders thereby putting the money back into their own economies and further increasing the economic strength of their countries. Fewer imports will reduce any trade deficits that a country may be facing, thereby reducing the debt levels of the country.

    Lastly, in the event that a country has issued sovereign bonds, the issuing country may be highly incentivized to devalue its currency in order to reduce its debt burden.

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    Deribit Bitcoin Futures And Options Exchange

    A handful of cryptocurrency option exchanges to trade Bitcoin options emerged recently, including LedgerX, Bitmex, Deribit, Quedex, Bakkt, and OKEX. Taking advantage of the opportunities of crypto-market volatility, especially Bitcoin market volatility, the Netherlands-based trading platform Deribit Bitcoin Futures and Options Exchange is one of the most liquid and renowned trading platform in the world that offers Bitcoin futures and options contracts.

    Classic put-call symmetry defines the relationship of call and put options linked by the price of the underlying according to the BlackScholesMerton option pricing model. An arbitrage opportunity exists in the market if this relationship does not hold. This opportunity gives sophisticated traders an opportunity to buy or sell stocks immediately to take advantage of mispricing and theoretically generate a risk-free profit.

    You Could Hodl If You Have Faith In The Market

    The term HODL came from a member of the Bitcoin Forum who misspelled the word hodling for holding. However, with crypto volatility, the typo is an acronym that stands for Hold On for Dear Life.

    If you have hopes that the value of various assets in the crypto market will surge in the future, you could wait for the volatility to unfold up to such a time in which you are comfortable with the returns.

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    Stylized Facts Of Options Pricing

    The option pricing literature has well documented the presence of two anomalies in the financial data that differ systematically from the BlackScholes model: a greater degree of excess kurtosis in the unconditional returns distributions and the presence of an implied volatility smile or skew as a result of the excess kurtosis in the conditional returns distributions . The options pricing literature also widely acknowledges the term structure of these anomalies, especially the manner in which they change with respect to maturity . Hence, some noticeable features that appear to hold across almost all financial markets have been identified .

    Fig. 2

    Bitcoin technical indicators are tools to predict the direction of Bitcoin price movement. Several indicators exist for Bitcoin trading, such as the Relative Strength Index , Ichimoku Cloud, Bollinger Bands, Moving Averages, Fibonacci and Volume Indicators, and so on . However, the analysis of these indicators on the estimation of implied volatility is beyond the scope of this study.

    How To Hedge Using The Dai Stablecoin Crypto Price Decrease

    How to hedge an altcoin portfolio

    Instead of going through the headache of moving in-and-out of crypto, investors can use Dai to move out of crypto and into US dollar. Since Dai is a cryptocurrency that is always equivalent to $1, investors can almost instantly sell bitcoin or ethereum to buy Dai without leaving their preferred cryptocurrency exchange.

    The hedge strategy is simple assume a portfolio of $100 with 50% bitcoin and 50% Dai .

    Now, if the price of bitcoin declines by 20%, the portfolio is over-allocated to Dai and under-allocated in bitcoin .

    Now to rebalance the portfolio, buy $5 of bitcoin with Dai. The portfolio is now rebalanced with 50% bitcoin and 50% Dai.

    With this hedge strategy, the investor instantly bought bitcoin at a discounted price, using Dai and rebalanced his or her portfolio.

    Since only the price of bitcoin decreases comparatively to the US Dollar and the actual amount of bitcoin an investor holds does NOT change the investor has accumulated more bitcoin at a cheaper price by taking advantage of this strategy.

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    Light Regs Allow For Quick Setup

    Like most Cayman hedge funds, your fund would be an exempted fund under Section 4 of the Mutual Funds Law .

    Such funds do not need to appoint a Cayman-based manager and fund administrator and are not subject to registration with the Cayman Islands Monetary Authority .

    The regulatory regime for an Exempted Fund is light compared to registered funds. They are exempt from notification to CIMA regarding certain changes in their offering particulars and are not required to file a Fund Annual Return along with audited financial statements.

    On the other hand, an Exempted Fund cannot have more than 15 investors, the majority of whom should be capable of appointing or removing the operator .

    However, most of these restrictions can be structured away. For instance, CIMA does not look through the number of shareholders in a feeder entity but instead treats it as one investor. So as part of your 15 investor cap, you can have several feeders with thousands of investors each.

    Please note that the light-touch regime for 4 Funds is changing with new requirements set to kick in by August this year. However, heres a hack: a single-investor fund this could be a single feeder! would still be benefiting from the light-touch 4 regime.

    A New Asset Class Cryptocurrencies As A Hedge Against Currency Devaluation

    While the traditional methods have been tried and tested, a new asset class is slowly gaining acceptance amongst individual investors and institutions as a hedge against inflation. Cryptocurrencies, which first came into existence a little more than a decade ago, not only provide protection against currency devaluation but offer it in a way that provides some protection for currency devaluation, liquidity and convenience.

    Bitcoin, which some call the digital gold, is often seen as a strong store of value. One of its most appreciated characteristics is its scarcity. Because only 21 million Bitcoins will ever be in existence, holders of the cryptocurrency do not have to worry about waking up one morning to find that the Bitcoin Central bank has decided to mint more Bitcoin to increase the currency supply.

    This property, which is possible because Bitcoin is a decentralized cryptocurrency, is one of the biggest advantages which this hedge has to offer. As an example, in countries where hyperinflation is the norm, holding on to an asset like Bitcoin could even be seen as a means of survival. Not only would the digital asset protect ones purchasing power, but in a country like Venezuela, where annual inflation has previously reached over 65,000%, it may be the deciding factor of whether or not an individual can afford to purchase basic necessities on any particular day.

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    Making Use Of Futures To Hedge Crypto

    Traders can also use derivatives to hedge cryptocurrency. Derivatives refer to contracts that derive their value from a primary underlying asset. The most common derivatives that traders use for hedging cryptocurrency are futures. A future is a type of financial contract between two or more parties that have agreed to trade a particular crypto asset at a predetermined price on a specific date in the future. A cryptocurrency future helps traders mitigate the risk of falling prices by taking a short future position, and profiting when the price increases by taking a long future position.

    Example of using derivatives to hedge crypto

    As an example, suppose a trader holds 1 BTC, worth $60,000, and wishes to lock in at this price. Each futures contract is worth $1 of BTC at this price, so when the trader opens a position, he would need 60,000 contracts. The trader is preparing to short the contracts in anticipation of a price and sells them. If the price does fall at the predetermined date, the trader buys back the futures at a lower price, pocketing the difference. However, if the price increases, the trader would incur a loss by buying back the futures at a higher price. On the other hand, if the trader takes a long position and holds the contracts, they would profit when the price rises and incur losses when the price falls.

    Invest When Everything Is Depressed

    My Crypto Portfolio Design REVEAL | How to Design your Crypto Portfolio | NO LOSS Strategy

    If John Templetons famous aphorism to invest when everything is depressed is true, now may well be the best time to gear up to deploy capital.

    A fund vehicle is the sports gear of the investment pro. Without a fund, your trading remains a chess game against yourself, your track record unacknowledged, your ammunition limited.

    Every private banker we speak with tells us their client is looking to put some money into crypto, but they lack investment-grade instruments.

    If youve been trading crypto over the last years, you already have an edge over a myriad of legacy investment managers in traditional asset classes. What they have and you dont is a fund.

    With this in mind, we hope this posting helps lower your threshold towards setting up your own fund as the natural next step. Do look us up when youre ready to take it!

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