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Crypto-Hedging Part 1: Alternatives to Cashing Out on your Coins and Managing Risks

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Hedging methods give you the opportunity to reduce your risks in times when you think that crypto prices will fall while keeping your coins, or at least staying within the segment, while also avoiding taxing in a certain period. That doesn’t mean that you won’t pay taxes on your profits, rather that you will be able to tweak the timing of the taxation, and maybe optimize the payable amount as well.

Also, in a lot of cases, it is easier and cheaper to enter a hedging position than straight up selling your coins. Sure enough, these positions have their own negatives cost- or otherwise. Trading fees, spreads, counterparty risk, cash losses, and particular tax issues could make them less alluring, while given the less developed state of the segment, availability is also an issue.

Traditional Vs Crypto-Hedging

In the case of liquid traditional assets (stocks, commodities, bonds, currencies), there is a wide range of assets and methods to choose from for hedging purposes, such as options, futures, futures options, forex options, ETFs, swaps…

While several of those now have the equivalent in the crypto-space, the real-world usage of the crypto versions is often far from the traditional ones, and their application requires much more effort and sometimes a leap of faith.

That said, the future is bright for those who want more flexibility in managing their exposure and the excessive volatility in the segment, as the number of available hedging assets is rising by the day – and that doesn’t just mean the widely covered BTC futures contracts or the LedgerX platform. But how does hedging work anyway?

Let’s dive into the basics.

The Basics of Hedging

The basic concept of hedging is that you purchase an asset that’s value is moving in the opposite direction than the one you want to protect. Traditionally, the producers of commodities used futures contracts to “lock-in” the price of their product for a certain future point in time.

Today, with all the hedging options available, the concept can be used for all kinds of time-periods, asset classes, and different levels of protection. Also, the assets once only used for hedging purposes are widely used “naked” – purely for speculative reasons, often taking advantage of the leverage applied through some of the products.

Leverage and Hedging

While not all hedging products use leverage, it is a natural and useful part of hedging as it gives a traditional hedger the opportunity to protect a large amount of exposure with a much smaller amount of cash. Imagine that with 5-10% of your protected amount, you can be sure that you will able to sell (or buy) your entire holding for the desired price.

That advantage could turn into a deadly weapon in the hands of a rookie speculator, who uses leverage (margin trading) to increase his profits or losses with no “products” or other assets to cover, the sometimes large, fluctuations in the value of the hedging asset.

Hedging and Cryptocurrencies

When it comes to cryptocurrencies, leverage is only loosely connected to the concept of hedging, and a lot of traders and investors are playing the markets with way larger positions than their invested capital.

That said, leveraged hedging products are already available, and they offer one of the best ways to protect your profits without selling your precious coins, and even giving you the flexibility to take additional positions in other coins that you think have a better risk profile.

Basically, for a small fee, you can get rid of the risk of holding your coins (for a while) without actually losing them.

Of course, not everything is rosy, as if you have all your capital in coins, with no significant cash holdings for example, you might have a hard time managing your positions. I will look into those and other problems in the second part of the article.

Hedging Strategies and Hedging Assets

Some accomplished investors say that the only hedging you need is diversification, and spending on hedging assets is a waste of time. That might be true for a lot of value-focused conservative investors, others might find significant value in the different methods listed below (and detailed in my coming article).

Also, although leveraged trading can be very dangerous, some of the leveraged strategies and assets (options, pair trading) offer ways to limit risks and trade more consciously.

In a broad sense the hedging strategies that I will cover can mean:

  • Holding a certain mix of coins, cash (fiat), and leveraged crypto positions
  • Holding special (derivative) assets such as futures or options contracts

For starters, what this means, is that you might need more than one account to access the desired products, which is a clear disadvantage compared to a non-crypto portfolio, but at the end of the day, the benefits might be worth the efforts.

Looking ahead to the exact methods we will discuss the following:

  • Derivatives: futures contracts, options contracts
  • Correlation-based hedging: safe-haven pairs, “Pair” trade hedging
  • Diversification
  • Tether USD and fiat holdings

While some of those might sound complicated, we will provide a step-by-step guide to understand and use the strategies. Stay tuned.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 277 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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6 Comments

6 Comments

  1. idm2000

    December 21, 2017 at 12:19 am

    Could you give us some examples? Thanks

    • Mate Cser

      December 21, 2017 at 2:38 pm

      Hi idm200,
      there will be detailed examples in the second part, coming up soon.

  2. Tarik

    December 21, 2017 at 1:58 am

    Anxiously waiting for part 2… can it be today? 🙂

  3. Montebrond

    January 18, 2018 at 3:40 am

    Hi Mate,

    When is part 2 coming?

  4. maximiliaan

    February 7, 2018 at 4:19 am

    huh, this was 2 months ago?

  5. Tarik

    April 13, 2018 at 6:51 pm

    Hello Mate, are you still coming with part 2? I am still anxious to continue the reading.

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Altcoins

Cryptocurrency Prices Have Recovered $26 Billion from Last Week’s Bear-Market Low

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Cryptocurrency prices were seeing green on Tuesday, as investors continued to rally behind news of a popular bitcoin trading app being granted regulatory approval to operate in New York. The push for regulated crypto custodial services has also not gone unnoticed, with the likes of Coinbase looking to overcome one of the final barriers to institutional adoption.

Crypto Prices Hit One-Week High

Digital currencies on Tuesday overcame tepid trading conditions and lower trade volumes to reach their highest level in seven days. The total market peaked at $294.2 billion at 17:00 UTC but has since consolidated at $290.5 billion, according to CoinMarketCap. As a reminder, the market bottomed near $264 billion last week, the lowest since early April.

Crypto prices have been surprisingly stable since last week’s brisk selloff. As Hacked reported earlier, bitcoin volatility is at its lowest level in a year even while factoring the latest price collapse.

Almost all of the top-ten coins had reported gains over the past 24 hours. Tron’s 8.3% gain was the biggest, with TRX trading at $0.048.

Ethereum rose 3.4% over the past 24 hours to trade at $536.86. Bitcoin cash reported slight gains, climbing 1.6% to $900.54.

Bitcoin was virtually unchanged compared with the same time Monday. The world’s largest cryptocurrency by market cap is up 2.5% over the past seven days.

Although trading volumes were a paltry $13.2 billion, turnover is up 39% from Sunday’s lows.

Prices received their initial boost Monday afternoon on news that Square, Inc.’s Cash app was granted a BitLicense to operate in New York. The app, which has a bitcoin trading platform, has more than seven million active users. The company, which is led by Twitter’s Jack Dorsey, saw its share price and market cap rise significantly on the news.

Custodianship: The Final Frontier?

San Francisco-based Coinbase has joined forces with hedge funds and third-party custodians to unlock up to $10 billion in institutional capital. According to some industry insiders, custodianship is the last of the major barriers to widespread cryptocurrency adoption among hedge funds, banks and day traders.

As Goldman Sachs, Nomura Holdings and others have demonstrated, there is strong appetite for cryptocurrencies at the institutional level. But without a stable and robust custodian service, staking large positions on a highly volatile market is not considered feasible. This is especially the case for funds that are involved with handling university endowments and pension programs.

According to Ari Paul, co-founder of the Blocktower crypto-focused hedge fund, institutional money has been trickling into the digital currency market since mid-2017. And while adoption has been slower than expected, “that doesn’t mean it’s not coming,” Paul tweeted May 31. “There are a lot of pieces that need to come together, one big piece being third party custody,” he said.

Kyle Samani, a cryptocurrency hedge fund manager, recently told Bloomberg that custodianship is viewed as “the final barrier” to market entry. “Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital,” he said.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 457 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Altcoins

TRON Spikes 21% in 24 Hours Ahead of Token Migration

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Only a few days away from its departure from Ethereum, TRON’s token price surged over the last day, racing to 21.4% gains in just under 22 hours.

That took the TRX token – which is due to go through the dreaded swap process on the 21st of June – from a starting price of $0.041 last night, to a price of $0.051 a few hours ago.

Since then its movement has corrected somewhat, but gains of around 14% have been holding steady since the sudden spike, and TRX is still close to the 5 cent mark as it tries to break out of the $0.04 range that it has been mired in since the sudden dip around early June.

TRX was trading at $0.10 on April 30th, and in the month and a half since then its value has sunk by an unbelievable 60%. In the same period, BTC lost just over 30% of its value, while Ethereum’s losses are closer to 40%.

In this context, TRON’s growth over the last 24 hours doesn’t seem all that out of place. Every day we see sudden gains recorded by altcoins which are correcting for sudden losses experienced earlier in the month.

TRON’s 60% loss over this period was itself a correction for the month of April, where TRX began the month trading at $0.030, only to find itself at a price of $0.10 just four weeks later. That 233% upwards movement was one of the best recorded by a Top 20 coin April, and the subsequent losses were almost equal in scale.

BitTorrent Acquisition

It was confirmed at the start of the week that TRON founder Justin Sun had followed through on his plans to buy the BitTorrent file-sharing platform.

A reported figure of $140 million is sure to make juicy headlines, and it marks one of the rare occasions when the crypto world has reached out and got involved with other industries. We can only speculate at this point whether Sun plans to simply oversee BitTorrent, or if he intends to integrate it somehow with his crypto platform.

Token Migration

On May 31st when the mainnet originally launched, TRON’s price didn’t see the kind of spike that everyone was expecting. By that time the long, bearish slide of May was already in full effect, and a price of $0.062 at that time would actually seem desirable now.

But now, in the ramp up to the token migration, TRX is starting to see some movement. It’s 24 hour volume is now three times as much as it was on Saturday – going from $114 million to its volume of $356 million at the time of writing.

Whether this is an omen of good things to come for the much hyped platform remains to be seen.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 11 rated postsGreg Thomson is a full-time crypto writer and digital nomad. He eats ICOs for breakfast and bleeds altcoins. Wherever he lays his public key is his home.




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Analysis

Crypto Update: Coins Pop Higher as Consolidation Continues

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Trading activity increased in the major coins today, amid a mixed news flow, and for now, bulls scored a small victory following last week’s bearish price action. Bitcoin, Ethereum and most of the largest digital currencies gained several percents, despite the weekend’s deterioration, and although the technical setup didn’t change significantly, an immediate breakdown has been averted.

The discouraging BIS report that has been making waves today wasn’t enough to push the coins below support, but for now, the short-term strength left the trading range intact with the primary resistance levels still keeping a lid on prices. Given the uncertain long-term picture, the coming weeks will be crucial for the largest coins and the whole segment alike, with Bitcoin being in the center of attention after its long period of relative weakness.

BTC/USD, 4-Hour Chart Analysis

Bitcoin held up above the April low, despite the bearish short-term picture, and the coin the highest price level in a week, breaching the $6750 level in the process. While the most valuable coin fared relatively well today, it clearly remains a laggard from a broader perspective, and it is still trading in a declining short-term trend, with several strong resistance levels just ahead.

The $5850 is the key from a long-term perspective, with further support levels at $6500 and $6275 and resistance ahead at $7000 and $7350.

Bearish Rotation Among Altcoins

ETH/USD, 4-Hour Chart Analysis

On a negative note, the leaders of the latest rally were among the weaker coins today, and that is a sign of bearish rotation in a segment, and until major resistance levels are broken traders shouldn’t enter new positions here. Ethereum managed to rally above $500 yet again, but it remained below week’s bounce high, leaving the trading range intact, while the declining short-term trend is also still dominant.  Strong resistance is still ahead between $555 and $575, while support below $500 is found at $450, $400, and $380.

EOS/USD, 4-Hour Chart Analysis

EOS, which is one of the strongest majors technically speaking also edged higher today, but it remains stuck in the declining short-term pattern, and below key support/resistance zone near $12. The coin is well below last week’s high and until a confirmed short-term trend change, traders shouldn’t enter positions here.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 277 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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