How to Protect your Cryptos from the Market Volatility

Beginner’s Guide / 19.03.2020

The occurrence of the great market crash in 2018, after the extreme volatility of cryptocurrencies, taught a hard lesson to many. The price of cryptocurrencies had vigorously fluctuated within two years. At the time, many started considering cryptocurrencies to be a highly unstable market full of uncertainty and speculation. Bitcoin was the first and largest cryptocurrency based on market capitalization. It experienced massive growth in 2017, mounting from $700 to almost $20,000! It made a +1,318% rate of return, not including any transaction fees, in merely 12 months.

Many people soared on the cryptocurrency bandwagon, and we can’t blame them, but soon the market became too unstable once it grew to massive levels. After that, cryptocurrency received an enormous collapse for the whole of 2018. Based on market capitalization, cryptocurrencies fell from an all-time high of $813 billion to a mere $100 billion, with the general prices of all coins close to 90%.

The moment cryptocurrencies start heading south, it doesn’t mean that you should sell all your investment holdings. However, it would be best if you remained keenly aware of their movements and the losses you’re willing to incur. Everyone wants their assets to be fruitful and multiply, but it’s impossible to avoid risk entirely when investing in the markets. Here are strategies that can help you protect your crypto portfolio from market volatility.

Crypto Volatility 101

Traditional finance defined volatility as the statistical measure of the dispersion of an asset’s price. In simpler terms, volatility establishes the extent to which an asset’s price fluctuates over time. The cryptocurrency market demonstrates volatility as its prices move aggressively up and down daily.

Is Volatility Good?

After understanding market volatility in cryptocurrency, one might ask whether the volatility is a good thing or a bad thing. There are two standpoints we can check. First is the trader’s perspective, where volatility is considered excellent.  Here, the person’s tolerance for risk will show the level of volatility that is good. Some individuals like risk-averse individuals value stable investments more; hence they manage to avoid high-volatility trades. Crypto traders are often risk-takers and will fall into high-volatility deals easily.

On the other hand, at an investor’s standpoint, volatility is neither a bad thing nor a good thing. Investors don’t care about trading to turn a quick profit but care about preserving their wealth. Here are some strategies to protect your cryptos from market volatility.

  • Sell Calls

Selling calls on your existing cryptocurrencies can be used to mitigate against losses and, at the same time, to enhance earnings. Being the seller of a call option can give the buyer of your choice the right to buy your cryptocurrencies at a specific price at a particular date, and you get an instant premium in exchange.

For example, let’s say you sold a call option for a premium of $100 on BTC/USDT at the above-market price of (BTC=$100) $250 for 14 days and prices fall to $120 at the expiry date, this will make you a profit of $100. You will receive the premium from selling the coin option, effectively balancing part of your losses from the fall in value in your BTC.

The seller of an option receives the premium, which can be used on additional portfolio protection, or you can treat it as a form of payment.

  • Buy Puts to Protect your Assets

You can buy puts either for speculative bets or to protect your existing position/portfolio. Once you buy puts, profits get generated when the cryptocurrencies value drops in value relative to another. Puts offer the buyer the right to sell his cryptocurrencies at a specific price and a particular date.

An example; let’s say you bought a put option for $10 on BTC/USDT with a strike at below market price (BTC= $200) of $180 for 28 days and price fall to $120 at the expiry date, you will have generated a profit of $50 ($60-$100), almost five times your premium.

Puts have one significant advantage; losses are limited, and the most you can lose is the premium you paid for the put.

Note that not everyone has a perfect strike price or expiration date. When dealing with crypto, always aim at setting a strike price that matches your risk tolerance and market bias. Thus, you will achieve dependable portfolio protection at a fixed cost once the strike price locks-in a minimum value of the assets in your portfolio.

  • Collar (Buy Put + Sell Call)

 The high market volatility makes options on cryptocurrencies expensive, and put protection often costs more than investors are willing to pay. Using a collar can help reduce those costs considerably.

A collar comprises two methods; to build a collar, you should buy a put below the market price and sell a call above the market price. Let’s put it in simpler terms. When you buy a put option, it protects the assets from downside risk, but you have to pay an instant premium. The call option earns you an immediate bonus after you sell a call. When combining the two, we use the instant premium from selling the call option to balance the cost of buying the put.

Establishing a collar can take minimum or no costs at all. Before launching a collar, you must decide which trade-off works for you because you may limit your profit potential after selling a call and still reduce the cost of protection even when marketers are rough.

  • Temporarily Exit Volatility

One surest possible way of completely escaping from volatility and protecting your crypto portfolio is exchanging more volatile crypto assets like Ethereum and Bitcoin, for stablecoins like Tether and True USD (TUSD).

Furthermore, temporarily exiting volatility markets makes it possible to capitalize on the market recovery by re-entering the market at a lower price than you exited. After the market recovers, your portfolio will be more extensive than it initially was with no additional costs overall, and you would be in a better position than you started.

Final Takeaways

Each of these strategies can help you protect your crypto portfolio from the volatility that exists in the cryptocurrency world. Choose one that will suit you or your risk tolerance. However, the information provided here is for information purposes only. Do proper research to determine what may be best for your individual needs.

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Born in Bucharest, Marius is the founder of Crypto Adventure. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.