Although many cryptocurrencies have experienced tremendous gains in the last several years, this meteoric growth hasn’t been without frequent periods of decline.
During these times, long-term holders can either assume these losses will be transient or negligible in the long run or take measures to protect their portfolios and maximize their overall profitability.
Fortunately, there are now several simple ways to protect your portfolio in a downtrend — but we’ll outline three of the most popular.
Hedge Your Spot Positions
Hedging is a strategy used to protect an investment against risk by opening another position that will profit should the market move unfavorably against the initial investment. Overall, the two positions should be designed to balance out regardless of how the market moves — effectively locking in the price of the original investment.
For the most part, this strategy is used by traders that believe in the long-term potential of a digital asset but are concerned that short-term volatility could lead to unnecessary losses. To avoid this, traders might look to short the market using one of the myriad cryptocurrency futures exchanges, which allow you to go both long and, perhaps more importantly, short on the market.
As it stands, there are futures products available for most major cryptocurrencies — including Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), XRP and more — making it possible to reliably protect most spot positions with a short hedge. Moreover, because cryptocurrency futures exchanges now offer as much as 150x leverage, it can be relatively inexpensive to hedge out risk.
Just be sure to close your short position once market volatility dies down and ensure your margin stays within platform requirements to prevent automatic liquidation.
Gain Interest on Your Unused Balance
Although opening a short hedge is an excellent way to create neutral risk exposure, it is far from the only way to protect your portfolio against losses.
Another way to achieve this is by simply accruing interest on your portfolio balance. As it stands, there are a huge number of well-reputed platforms that offer as much as 10 percent interest on cryptocurrency deposits — allowing you to grow your underlying balance with little to no risk.
Popular cryptocurrency futures exchange StormGain frequently offers 10 percent APR on deposits of Bitcoin, Bitcoin Cash, Ethereum, XRP, Litecoin and Tether (USDT), whereas a handful of other platforms, including BlockFi, Nexo, and Celsius Network, offer between 4-6 percent APR for these same assets — a less impressive, but still respectable, sum.
With that said, although 10 percent interest per year is unlikely to protect against serious market swings, it can help offset minor losses associated with market volatility and can be a viable way to grow your portfolio with little effort.
Temporarily Exit Volatility
For those that want to completely escape from volatility and protect their portfolio in the surest way possible, simply exchanging more volatile crypto assets, such as Bitcoin, Ethereum and XRP, for stablecoins like Tether and True USD (TUSD) is a good way to accomplish this.
Likewise, by temporarily exiting volatility during periods of decline, it is also possible to capitalize on the market recovery by re-entering the market at a lower price than you exited. Once the market recovers, you’ll then be in a better position than you started — since your portfolio will be larger than it initially was, at no additional cost, overall.
For example, if you own one bitcoin at a current market value $9,000 but you believe the market will crash by 50 percent, for whatever reason, before recovering, then it is in your best interest to exchange to a stablecoin at $9,000 and wait until the market crashes and begins to show signs of recovery. Assuming you buy back in at $4,500 using the $9,000 worth of stablecoins you received when you exited volatility, you could then purchase two bitcoins.
Should the market recover as predicted, you will eventually be in a position where you have two bitcoins, worth $9,000 apiece, for a total portfolio size of $18,000. How’s that for turning a bad situation on its head!