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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 353 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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Cryptocurrencies

Exploring the Korean Bitcoin “Kimchi Premium”

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Korean Kimchi Premium

If you have been trading Bitcoin for over a year, you will no doubt have heard of a weird market phenomenon called the “Kimchi premium”.

This is essentially the premium that Korean traders will pay over the international price of Bitcoin.

More specifically, it is the difference between the USD equivalent of the KRW price of Bitcoin vs. the USD price of Bitcoin on an international exchange.

This premium has varied anywhere from a few percent to over 20% in periods of severe market volatility. This opens up a whole host of questions around potential “arbitrage trades” between the markets.

So, can you take advantage of the Kimchi premium? Do other local market premiums exist?

In this post, we will give you everything you need to know about the Kimchi premium as well as the potential to trade it.

Kimchi Premium Example

Before we can take examine the implications of the Kimchi premium, it helps to take a look at a practical example of it in the markets today.

At the time of this post, the price of Bitcoin on an international exchange such as the Binance exchange is currently sitting at $6,618. However, if we take a look at the price of Bitcoin on a South Korean exchange such as Bithump, it is currently 7,540,000 KRW.

The current exchange rate between the Korean Won and the USD is about 1,100 KRW/USD. This means that the price of Bitcoin on an exchange like Bithump converted into USD is $6,854. This is about a 3.5% premium over the price of Bitcoin on Binance.

While this is far from the 20% premium that we have seen in the past, a 3.5% risk free profit would entice many traders who trade arbitrage. Yet, there are a number of factors that you need to take into account before you can consider attempting to arbitrage this market.

Triangular Kimchi Arbitrage

If a trader wanted to take advantage of this Kimchi premium, then they would have to buy Bitcoin in USD, send the coins to a South Korean exchange, sell them for Korean Won and then convert them into USD. Below is an example of the triangular arbitrage nature of the trade.

Triangular Arbitrage Example with Binance and Bithump

This is a simple example of how it will work. However, there are a few things that you should consider that could reduce the potential gains. These are fees, both on the exchange side as well as the fiat banking side. There is also the added scrutiny that comes from fiat currency exchange controls.

In terms of fees, there is likely to be a Bitcoin network fee as well as a withdrawal fee from Bithump. Then, when you try to send the funds abroad, you are likely to encounter more fees on the purchase of USD (rate above is spot) as well as international wiring fees.

When all of these fees are added up, it is likely that the Kimchi premium will be greatly reduced.

Another really important consideration is the requirements in order to obtain an exchange account and bank account in South Korea. There is no doubt that they will want to see proof of residency for the applicant.

So, unless you happen to have access to both a South Korean trading and Bank account, then you may find it difficult to ever place an arbitrage trade on the Kimchi premium.

However, I have observed similar market premiums on a number of other local currency exchanges in the past. I have seen premiums between the USD and the EUR, AUD, CAD, JPY and ZAR prices on these exchanges.

All that is required is you to observe the USD equivalent of the different currency prices for Bitcoin on Coinmarketcap. Interestingly enough, the South Korean exchanges have actually been removed from these calculations given the pricing distortion they had on prices in the past.

In order for you to make the most of these local market premiums, you have to understand why they are present.

Why Do they Exist?

Arbitrage opportunities exist in the Bitcoin markets because of the varying degrees of local supply / demand vs the demand on international markets. There could be specific reasons that an individual country has such high demand for Bitcoin

In the case of Kimchi premium, it is well known that South Korean users are much more bullish than their counterparts in other countries. This excessive demand will drive up the price of Bitcoin in Korean Won.

Taking a look at a more extreme example, you have the case of Zimbabwe.

Prices for Bitcoin in Zimbabwe have exceeded the international price by over 60% in the past. Bitcoin is so highly prized in Zimbabwe because of the hyper inflation that is currently gripping the country. The same can be said for other countries such as Venezuela or Argentina currently.

A 100 Trillian Bank Note in Zimbabwe. Source: citeco.fr

These premiums also exist because they are hard to take advantage of. For example, it would be very hard to use any traditional banking in countries such as Zimbabwe or Venezuela to take advantage of the premium. Who would trust their fiat money in a country where the inflation rate tops 100,000%?

There are also a number of countries that have exchange control limits on their citizens. On the individual level, these are likely to be quite low which means that eventually you will be stopped from converting your local currency for USD.

In the more secure western countries, the premium may still exist merely because there is not enough money pursuing the trade. This is the more favourable position to be in and it means that you as an individual have a slight advantage over larger hedge funds and institutional money managers.

These established markets with developed banking infrastructure are the most likely place for you to try and take advantage of these opportunities.

Conclusion

While markets have fallen considerably over the past few months, so has the Kimchi premium. This is probably as a result of South Korean trader’s lack of appetite for Bitcoin currently.

However, this is likely to turn the moment that the next Bitcoin bull market rolls in. South Korean traders will feel a great sense of FOMO and the local demand for Bitcoin is likely to increase.

As the Bitcoin markets are still relatively unexplored by large financial institutions, pricing inefficiencies are likely to remain along with the Kimchi premium.

Featured Image via Fotolia

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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5 stars on average, based on 3 rated postsNic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs.




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Altcoins

Why Investors Should Pay Attention to Chainlink

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The blockchain industry is still very much in its early stages, and is seen as “the disruptor” to banks and many other industries. But that doesn’t mean there can’t be disruptors within the industry. Companies that pop up and begin to threaten incumbents in a certain space.

The last few days have shown that exact event occurring with a relative unknown called Chainlink. A few positive announcements have catapulted them up onto the map within the oracle space, and it is unclear where this will take them in the future.

What is a Blockchain Oracle?

Smart contracts are incredibly effective and novel ways of handling automation and decision-making, but they currently live inside the “walled garden” of their own ecosystem. We have discussed companies that connect different blockchains, as well as companies that use blockchain to connect real world assets, but there is also a need to connect data external to the blockchain.

The term oracle comes from Ancient Greek mythology where people didn’t have enough information to make decisions and would go to oracles for additional inputs. This is exactly what “oracles” aim to do. Connecting Dapps and APIs is just the beginning of the power of oracles.

Bitcoin and Ethereum operate in a form of isolation, with no connection to information outside of their respective chains. This makes validating conditions of smart contracts very difficult. Ideally, an oracle would be able to translate outside information into terms that Dapps could understand, thus triggering (or not triggering) the smart contract.

The idea is that much like Coinbase acts as a gateway for a large amount of the funds going into the blockchain ecosystem, one company would likely be able to become the gateway for much of the information flowing into the ecosystem.

Chainlink as a Competitor

Ever since people realized there was massive potential for whoever could figure out how to bring information like price changes, payments, or even something as innocent as temperature into the blockchain, more companies have been working on solving this problem. Oraclize has long been seen as the frontrunner within the industry, with other behemoths like IBM and Microsoft throwing their hats in the ring as well.

Chainlink was late to the game, but has made significant progress in the time they’ve been going after market share. With high profile partnerships including SWIFT payments, IC3, and Gartner, they are hardly an unknown anymore.

Their coin, LINK, is what is used to pay for an Oracle (or a node) to provide data. The services offered include certification, validation, and reputation services, all with the goals o f enforcing the overall integrity of the networks’ Oracles. Historically, Chainlink has been weak on the connection from and aims to let their technology do the talking. Right now, their mainnet is not yet live, and it still isn’t’t clear when it will be released. For this reason, the only way to really judge how they are doing is based on their partnerships and their listings.

Chainlink’s Recent Performance

In the last few weeks, we have seen Chainlink climb up the rankings to enter the top 20 ERC-20 tokens in terms of market capitalization. Up a wild 23.8% in just the last week, this is due to a combination of a few pieces of news. First, Bithumb announced that LINK would be listed on their exchange. Then, Chainlink announced a partnership with Gamedex where they would translate professional sports match results into the Dapp.

These few pieces of information alone don’t mean much, but there is often a momentum play that can be made as a company comes out of obscurity. Being in the top 20 of market capitalizations is a good tell.

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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Cryptocurrency Market Gives Back Most of Last Week’s Gain; XRP Plunges

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The cryptocurrency market extended its slide on Tuesday, with XRP’s double-digit drop leading the decline as sellers regained the upper hand following weekend consolidation.

Market Update

The combined value of all cryptocurrencies fell by another $10 billion on Tuesday to $207.5 billion, the lowest in five days. The selloff was accompanied by a slight pick-up in trading volumes with total market turnover reaching $14.2 billion.

XRP was by far the biggest decliner, falling 15.2% to $0.452. The third-largest cryptocurrency by market cap is down 34% from recent peak levels.

Ethereum also fell hard on Tuesday, shedding 9.1% to $212. EOS also declined 9.1% to $5.18. Meanwhile, bitcoin cash was off 5.5% at $441.

Compared with altcoins and tokens, bitcoin’s price action was more subdued. BTC declined 3% to $6,426 but saw its market share climb to 53.6%. Bitcoin’s dominance rate recently fell to its lowest in almost six weeks.

Struggling for Momentum

The Tuesday selloff was an extension of early-week volatility that saw coin values decline by more than $10 billion. Since peaking slightly above $230 billion last week, cryptoassets have lost $23 billion in combined value.

The sudden and sharp reversal wasn’t entirely unexpected. XRP faced extremely overbought conditions after prices more than tripled last week. Investors’ euphoria stemmed from a trio of announcements involving XRP’s parent company, Ripple Labs, which pointed to wider mainstream adoption of blockchain technology and cryptocurrency.

XRP’s massive gains fueled optimism that other comparable projects would soon follow suit. Stellar XLM, another high-profile blockchain project, surged last week amid news it had acquired Chain, a San Francisco-based startup. Stellar’s commercial arm and the newly acquired Chain formed a new company called Interstellar.

For all the positive developments underway in the blockchain arena, cryptocurrencies remain firmly entrenched in a long-term bear market. This is unlikely to change in the near future as capital flows into ICOs dry up and leading projects like Ethereum address their litany of issues.

As Hacked reported last month, the cryptocurrency market appears to be undergoing a paradigm shift as low-quality coins embark on a mass extinction event. Ethereum’s Vitalik Buterin once predicted that 90% of tokens listed on CoinMarketCap will go to zero. Presently, there are 1,993 projects listed on CoinMarketCap. Among them, 1,593 have a market cap higher than zero.

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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4.6 stars on average, based on 613 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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