‘Manage risks’, is the advice often given to new traders entering the crypto market. However, it is easier said than done. How do you manage risks in an excruciatingly volatile crypto market? Here we will lay down a list of strategies used for hedging risk in crypto trading.
What is Hedging in Crypto Trading?
Hedging is a way of minimizing losses. It mitigates the risks. Hedging in crypto trading is not meant for earnings or gaining profits. Crypto traders go into the market with their hard-earned money. However, the market can swing in unfortunate directions. In such cases instead of making profits, a trader should rather protect their primary assets. There are three ways in which traders can protect themselves.
1. Diversifying Portfolio:
There is a famous saying, don’t put all your eggs in one basket. Essentially, this means hedging the exposure. Traders should diversify their portfolio by investing in multiple coins.
Bitcoin is the king of cryptocurrencies. It is the most popular cryptocurrency with the highest trading volume. Nevertheless, bitcoin is extremely volatile and so are many other crypto tokens. New traders opt for popular coins oblivious of the fact that some not-so-well-known coins with less volatility are a better bet.
Diversification is intended to make the portfolio a mix of different currencies. Bear in mind that most cryptocurrencies follow the established market trend. For instance, if bitcoin is losing value then most of the other coins will follow the same downward trend. Hence, you should make diverse choices based on coin’s behavior. Make portfolio combination such that when some of the coins in your possession lose value others either gain it or stay stable.
Altcoins such as $ETH, $LINK, and $BNB, etc are an option for diversifying the portfolio. You can also put your money in stablecoin (pegged to fiat) which are a lot less volatile than other digital currencies.
2. Short Selling Crypto:
It is another way of hedging risk in crypto trading. Short selling means that you sell borrowed coins when you see the value going down in the future. Profit is made from the price difference. Almost all popular exchanges offer the feature of margin trading. Here is how that works.
A trader is holding Ethereum because they expect its price to go up. Nonetheless, the risk is always present. So, in order to hedge risk, the trader opens a margin trading position, borrows $ETH from an exchange platform like Kraken, and sells them immediately. If the price of ETH goes down then you can buy back at lower price pay the lender and keep the profit to yourself. In this way, the earning you made out of the exercise will cover the loss you get from $ETH in possession.
The downside with short selling is interest and transaction fees. However, if the price difference is massive then this technique is worth a shot.
3. Utilize Derivatives:
Derivatives have become very popular among crypto communities lately. For starters, a derivative is a security that gains value from other assets. Futures, forwards, and swap, etc. are examples of derivatives.
In order to hedge risk in crypto, you can effectively use derivatives. For instance, a trader makes a future contract to buy certain crypto tokens at a pre-decided price at some point in the future. Now if the market price rises exponentially, the trader will still have to pay the agreed-upon price. Thus, the risk of paying more
The good thing about derivatives is that they can help you earn profit in both cases, i.e price rise, and price fall. Just use the right kind of derivative in line with the market predictions.
Conclusion: Hedging Risk In Crypto Trading
The above mentioned three strategies can effectively hedge risk in crypto trading. However, you have to be extremely careful while making predictions regarding prices. Short selling and derivatives depend on market movement prophecies. You have to be sure about the price trend before you make any decision. So, our advice is to be careful with data and information sources.
You can also trust us with certain things. We have an enthusiastic and successful team of crypto traders. They are here to help you with technical analysis, market sentiments, and up-to-date data. Get in touch with our team at your convenience.