Beat the bear — 5 strategies for managing your crypto during a downturn
In the current market environment, it is becoming increasingly difficult for crypto investors to stay positive when looking at their portfolios. The bitcoin price has dropped by over 55 percent year-to-date and the altcoin market is down by even more. These are tough times for cryptocurrency investors, especially those who have only recently entered the market and missed the massive gains leading up to 2018.
But that doesn’t mean there’s nothing that can be done. This article introduces investors to several proven strategies to cut their losses and perhaps even turn a profit.
1. Hedge your portfolio by shorting Bitcoin
One of the easiest and most common ways to manage a crypto asset portfolio in a downturn is to overlay your portfolio with a bitcoin short position. In other words, you short bitcoin so that the drop in the value of your portfolio is partly or wholly offset by the profit from your bitcoin short when the market declines.
For example, if your cryptographic asset portfolio is currently worth around $50,000 (or 8 BTC), you could enter into a short BTC position at a CFD broker that supports the BTC/USD trading pair. You could set the hedge ratio to 75 percent, for example, so that a drop in portfolio value would be covered by around 75 through the profit from your bitcoin short.
That would mean your portfolio would only lose around 25 percent as much as it would if it were left unhedged. Conversely, if the market rallies, you would only generate 25 percent as much profit due to the loss on your BTC short.
For more information on the various available methods of shorting bitcoin, you can read Brave New Coin’s report “Don’t believe in Bitcoin? Here are 5 ways to short it,” which covers the topic in more detail.
2. Rebalance your portfolio towards higher USDT and BTC holdings
Despite all the controversy surrounding Tether (USDT), it comes as no surprise to see the cryptocurrency equivalent of the US dollar entering the top ten leading crypto assets by market share as the market continues to tumble. Many investors are moving their funds from crypto into “cash” while markets are bumpy so that they can then re-enter the market at a more opportune time without the fear of losing money due to crypto market volatility.
Bitcoin (BTC) is another asset that investors are piling into to protect their portfolio’s from steep drops in value in the current bear market as it is the most stable crypto asset in the market.
Wall Street analyst Tom Lee pointed out to CNBC’s Fast Money that bitcoin is regaining market share as investors are moving funds back into the leading digital currency as they believe that “bitcoin is the best house in a tough market.”
Blockchain asset investment fund TaaS, for example, has taken the approach of rebalancing its portfolio towards USDT and BTC and has allocated 16.25 percent to USDT and 49.73 percent of its funds to BTC to be defensively positioned in today’s challenging market climate.
3. Consider swing trading
Investors who are able to spend a substantial amount of time in front of a computer to actively manage their crypto asset holdings, changing from a more passive portfolio management approach to swing trading may see a pay off during a bear market.
Swing trading refers to actively entering and exiting positions (both long and short) within a matter of days or week to capitalize on short-term market trends. This strategy could work well for experienced traders who can disseminate market-moving news quickly and are able to position themselves accordingly to profit from resulting price movements.
A ‘negative news’ alert from Cryptocurrency Newsfeed helps traders stay ahead of the market
In order to stay on top of up-to-the-minute developments in market news and sentiment, consider subscribing to a service like Cryptocurrency Newsfeed, which provides near real time crypto news and sentiment analysis across the spectrum of digital assets.
4. Adopt a market-neutral investment strategy
As an alternative to swing trading, experienced crypto investors could also mimic hedge fund strategies that are proving to be lucrative in the current market environment. According to a report by Bloomberg, crypto funds that specialize in market making and arbitrage have managed to generate a profit in the first quarter of 2018 while the crypto market dropped by around 40 percent.
Pivot Digital Trading-2, run by Hong Kong-based financial services group Amber AI Group, is a high performer in this field. By deploying a market-neutral investment strategy, the fund has reportedly generated a 30 percent ROI from January to March 2018. BitSpread Group’s Market Neutral Liquidity SP-Institutional Fund, which deploys a similar trading strategy, also reportedly managed to book gains in the first quarter.
The positive returns of the two funds mentioned above suggest that advanced trading strategies, such as a market-neutral strategy where you go long and short comparable assets at the same time, have the potential not only to reduce portfolio losses but to actually generate a return in a bear market. Having said that, in a bull market, this type of investment strategy does not generate as much ROI as being long the market.
Yes, you probably do not want to hear this but if you believe in the future value of the crypto economy and cryptographic assets, you could also close your eyes and “hold on for dear life” as this year’s market volatility continues to unfold.
Looking at price charts since the start of the year, we know that “hodling” has not paid off and it would have been better to have gotten out in January this year and re-entered at a later point in time. However, those who bought bitcoin in January 2017 and have “hodled” through the volatility are still 500 percent up today.
Continuing to “hodl,” therefore, could also be a viable strategy for those who have faith in a bright future for crypto, provided their invested funds are not savings earmarked for specific purchases in the near or medium-term future.