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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.

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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

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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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3 Comments

3 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? 🙂

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Altcoins

NEO Shows Poise While Other Cryptocurrencies Struggle

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NEO has quietly emerged as one of 2018’s best performing cryptocurrencies, defying multiple market selloffs en route to new highs. The so-called Ethereum of China has also carved out a name for itself in the fast-growing ICO market, where it is now among a small handful of blockchains enabling startups to raise capital through the popular crowdfunding model.

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New Record Highs

NEO was the only major cryptocurrency to spike this weekend, even as bitcoin and Ethereum suffered declines. The coin pushed higher on Monday, hitting a new record of $205.46. It would later consolidate around $190 for a gain of 17%.

The latest rally gives NEO a market cap of $11.8 billion, putting it eighth among active cryptocurrencies. Trade volumes over the last 24 hours reached $1.5 billion with 65 million tokens in circulation. The majority of the turnover occurred on just two exchanges: Upbit and Binance.

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With the gain, NEO’s value has appreciated around 120% year-to-date. That’s nearly double the price growth of Ethereum, a comparable platform that recently took back the second seed on the crypto market cap leader board.

Ethereum of China

NEO’s trajectory over the last six months has mirrored Ethereum’s both in terms of value and project development. Its success is partly owed to ether, as both cryptocurrencies are based on smart contracts. NEO differs from Ethereum on several fronts, including the execution of C# code, which makes it more attractive for developers.

Beyond the hype, NEO provides developers with the toolbox to advance the smart economy by digitizing assets and automating the management of those assets through smart contracts. It is perhaps the only cryptocurrency that can succeed in a heavily regulated China, which only recently tightened the noose on cryptocurrency miners as part of its broad offensive against digital assets.

With the exception of Stellar Lumens, NEO is perhaps the only cryptocurrency not named Ethereum that is making inroads into the ICO market. Dozens of token raises have launched on the NEO platform, including 27 in the span of two days. Although China has banned ICOs, there’s a possibility that regulators may one day introduce a centralized model that will allow the government to oversee the entire process.

According to at least one metric, ICOs raised more than $6 billion last year, with December being the most successful month yet with more than $1.6 billion raised.

While this is merely speculation at this point, the Chinese ban on cryptocurrency was initiated just before the 19th National Congress of the National Party. The event, held every five years, is usually a showdown between communists die-hards who want to maintain the old system of central planning and those who are seeking more liberal reforms.

Regardless of China’s regulatory future, NEO appears poised to capitalize on any opportunity involving public blockchain. The company certainly has that ambition, and has shown no issue following national guidelines.

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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Altcoins

Ripple Crashes to 2018 Lows Amid Lingering Doubts Over South Korean Regulation

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Ripple took the plunge on Monday, falling to its lowest level in nearly three weeks as investors continued to ponder South Korea’s regulatory shakeup of the cryptocurrency market.

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XRP/USD Price Levels

Ripple’s native XRP token touched a session low of $1.47 on Monday, which represented a decline of more than 16%. The coin’s price was last seen hovering at $1.58 for a loss of 10%.

XRP briefly traded at its lowest level since Dec. 29. The token is currently testing the Jan. 11 low of around $1.57.

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At present values, Ripple is capitalized at $62 billion, according to CoinMarketCap. That’s roughly half of Ethereum, the world’s no. 2 digital currency system. Ripple had briefly claimed the second spot in the crypto charts before a brisk selloff knocked it from record highs.

Ripple ran into volatility last week after CoinMarketCap removed several South Korean exchanges from its listing due to “extreme divergences in prices from the rest of the world.” The action prompted a multi-billion-dollar selloff of XRP, which is traded heavily on the Korean peninsula.

Why is Ripple Plunging?

It has been a roller coaster two months for Ripple. The cryptocurrency has managed to distance itself from other altcoins thanks to growing institutional support from major banks, credit cards and clearing houses. News of major partnerships sent XRP north of $3.30 after New Year’s day. The gains were quickly followed by profit-taking that was followed by a sharp correction in the cryptocurrency market.

The latest drop is largely attributed to fears over pending South Korean regulations governing cryptocurrency. Hacked reported earlier that central authorities were looking to shut down anonymous trading on domestic exchanges, not ban cryptocurrencies entirely.

The initial shockwave was triggered by Justice Minister Park Sang-ki, who announced Thursday that his department was proposing a bill to regulate the crypto market. The Korean government later said it was considering a response to what it believes to be excessive speculation, but had not reached a decision.

Like other cryptocurrencies, Ripple’s record-breaking gains have been largely driven by South Korean trade desks. Of the nearly $2 billion in XRP tokens transacted Monday, roughly 55% were traded using the won, according to CoinMarketCap. Bithumb continues to be the biggest platform for XRP trades, followed by Upbit and HitBTC. Bithumb and Upbit are both based in South Korea.

It hasn’t been entirely negative for Ripple. The company recently announced a partnership with MoneyGram that will provide the remittance firm with instant liquidity. The partnership appears to be a pilot program, with MoneyGram testing XRP payment flows via xRapid, the cryptocurrency’s blockchain solution for real-time liquidity.

XRP has the ability to settle transactions within seconds, thereby enabling faster cross-border flows. Its potential is currently being explored across Asia’s financial district, giving XRP the unofficial distinction of being the banker’s cryptocurrency.

Ripple’s fundamentals as a transaction agent suggest it still has room to grow in a highly diverse cryptocurrency market. There’s also speculation that U.S.-based exchange Coinbase is considering XRP for its platform. The exchange only supports four cryptocurrencies at the moment, including bitcoin, Ethereum, bitcoin cash and Litecoin.

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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Analysis

Technical Analysis: Cryptocurrencies Start Week on a Quiet Note as NEO Shines

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The broad Bitcoin-led correction continued to dominate trading in the crypto-segment throughout the weekend, as the most valuable coin drifted sideways above the key technical level at $13,000, with dwindling trading volumes.

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BTC remains in a declining short-term pattern, although the digital currency still holds well above the mini-crash lows from December, spending almost a month now in the daily range of the year-end plunge. We still expect the largest coin to complete the current cycle with a move below the crash lows and the $10,000 level after the stellar rally of the previous months. Key support is still found near $13,000, with further levels at $11,300, $10,000, $9000, and stronger levels at $8200 and $7700

BTC/USD, 4-Hour Chart Analysis

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Altcoins also settled down across the boards with only a few coins registering strong activity. Ethereum and NEO have been among the coins making headlines, as the second largest coin continued to grind, higher still trading near its recent all-time high today. The price of the ETH token is moving in a short-term uptrend, in the face of the stretched momentum indicators, but we expect a meaningful correction soon, and long-term investors should wait for a more favorable technical setup before entering new positions, with key support levels at $1000, $850, $740, $625, and near $575.

ETH/USD, 4-Hour Chart Analysis

Ripple remained under heavy selling pressure in the meanwhile, as the oversold bounce of the weekend faded away and the coin got close last week’s lows again. As the short-term downtrend is intact, traders should stay away from entering new positions, while investors should wait for short-term sell-offs towards the main support levels at $1.50, $1.25, and $0.85 to add to their holdings.

XRP/USDT, 4-Hour Chart Analysis

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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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