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How to Protect and De-Risk Crypto Portfolio


14 July 2020

The common phrase or idiom "no pain, no gain" can be associated with any sort of struggle, difficulty, or challenge. When it comes to investing and trading cryptocurrencies like Bitcoin, Ethereum, Ripple, or more, the higher level of risk associated with these assets means they also carry a far higher level of reward via upside potential. These young emerging technologies have the potential to change the world and become the future of money, replacing paper currencies that have been in use by civilizations for thousands of years.

But the risk associated with crypto assets can be greatly minimized through a number of carefully thought out strategies, and by taking positions in uncorrelated or anti-correlated assets as a hedge to one’s overall crypto portfolio holdings. This guide will walk you through some of the safest strategies to protect your Bitcoin holdings and de-risk your crypto-focused portfolio.

Hedge Bitcoin Holdings With Altcoin Positions


Altcoins like Ethereum, Ripple, EOS, and Litecoin have a unique relationship with Bitcoin. Oftentimes, both of their prices move in tandem, showing a tight correlation between them. Other times, they move completely opposite one another.

Throughout much of 2019, the relationship between Bitcoin and altcoins has been anti-correlated, with altcoins failing to rise alongside Bitcoin. The divergence between the assets can be seen through BTC dominance charts – a metric used to determine Bitcoin’s value in comparison to the rest of the crypto market.

However, this is not the norm, and altcoins can provide a profitable substitute during times when Bitcoin is consolidating around support or resistance. Cryptocurrencies have shown explosive growth in the past, and are still a very young technology with much untapped potential.

To ensure the investor doesn’t miss out on other future opportunities in the crypto market, a portfolio that includes Bitcoin and a variety of altcoins from the top ten cryptocurrencies by market cap should be considered and can be extremely successful. Investors should always perform due diligence and research before selecting any altcoins and seek out tokens that have real-world use cases and utility to derive their value from. These utility tokens can protect an investor from Bitcoin price failing, as the utility these tokens provide would in turn continue to provide value. 

Hedge a Crypto Portfolio With Uncorrelated and Anti-Correlated Assets


Just as altcoins can often show anti-correlated price movements in comparison to Bitcoin, many other markets are simply so far disconnected from Bitcoin and the categories each market touches such as the financial or technology sector, that they move entirely anti-correlated or uncorrelated to Bitcoin and make for a great choice as a hedge for crypto holdings.

For example, many commodities such as oil or natural gas that have been traded for ages will show completely uncorrelated price movements.

Gold has recently shown some correlation with Bitcoin in 2019 as both assets began the early stages of a new bull run, but they’ve since diverged again with Bitcoin falling and gold continuing to rise.

In recent weeks, many stocks and indices have also demonstrated price movements opposite of Bitcoin, suggesting that there are opportunities to de-risk a Bitcoin or crypto heavy portfolio at every turn.

Tech stocks are among the best possible ways to gain exposure to steadily performing assets. The technology adoption lifecycle keeps new technologies growing at an exponential rate as the technology’s userbase and network grows. This has proven to be effective for investors who are betting on the overall global technological revolution.

One way to gain exposure to these markets, is by opening long positions on stock indices such as the S&P 500 or UK100 while also holding Bitcoin as collateral. This well-rounded investment strategy is offered by platforms such as PrimeXBT, a Bitcoin-based margin trading platform that offers cryptocurrencies, forex, stock indices, commodities and more at up to 500x leverage. By holding Bitcoin on PrimeXBT and using it to gain exposure to a variety of additional markets including stock indices, investors can build a safe, diverse, and strong-performing investment portfolio. 

Hedge Against Crypto Volatility With Stable Assets


Bitcoin and crypto performance is often tied to times when there is economic certainty. If the economy is doing well, investors and traders have a higher appetite for risk-carrying assets like emerging markets, crypto assets, and even the stock market.

However, during economic turmoil, or if there are fears over a coming recession, investors often de-risk their higher-risk assets, and move into safe haven assets that have regularly shown stability.

Gold is often lauded for not only its stability but its performance during times of economic distress. Gold has been used throughout the ages as a form of currency and tool for trading, and due to its longevity investors and traders turn to it as fears rise.

Similarly, forex currencies such as the Japanese yen and Swiss franc are often considered “safe haven” assets during global economic downtrends. These countries have a strict economic policy and steady growth that helps their native fiat currencies stay relatively stable. Investors and traders know this, and often use these forex currencies to reduce overall risk in their trading portfolios.

Traditional assets often serve as the best hedge against non-traditional assets like digital currencies, and high-risk pot stocks or other emerging markets.

Hedge Long-Term Bitcoin Holdings With a Short Position


Most Bitcoin investors and traders are in Bitcoin for the long-term. While Bitcoin can be extremely profitable trading its short term movements, most believe that eventually, Bitcoin could reach valuations of $100,000 or more per BTC due to the inherent scarcity hard-coded into Bitcoin’s protocol. 

If an investor or trader has a large amount – or any amount – of long-term Bitcoin holdings, it would be wise to open a short position whenever Bitcoin price meets strong resistance, or as Bitcoin’s rally starts to correct.

The thought process behind this strategy is that if Bitcoin value is dropping, traders can offset any losses accrued by hedging with a short position. The short-term short position in BTC will generate profit as the long-term position drops in value.

Hedge Against Cyber Crime by Choosing the Right Platform


One of the most overlooked ways Bitcoin holders can protect their assets and portfolio is by choosing a platform with many layers of bank-grade security. Any trading platform must include address whitelisting, to ensure only verified addresses can be sent Bitcoin. Two-factor authentication is also a necessary inclusion, as cyber criminal’s methods have only advanced as crypto technology grows.

Conclusion


The Bitcoin and crypto market is incredibly lucrative for investors and traders with a high appetite for risk. However, these same investors and traders do not need to expose themselves risk unnecessarily, and can even take steps to mitigate any risk in holding crypto asset by diversifying across multiple assets, taking out short or long hedge positions, and by ensuring the platform of choice offers all of this plus the necessary security measures to keep assets safe and secure.

Only one crypto platform stands out as the one-stop-shop for all of the key needs to achieve a low-risk portfolio comprised of Bitcoin, crypto and traditional assets, that also provides the tools traders need to capitalize on and profit from both rising and falling markets.

PrimeXBT offers a wide variety of traditional financial assets that are uncorrelated to crypto markets, such as forex, commodities, stock indices, along with spot gold and silver. All assets – even the newly introduced altcoin/BTC pairs – are available for trading on up to 100x leverage (500x for forex) meaning traders can profit no matter how tight the trading range or how little volatility there is in the market when it is indecisive. 

Recently, PrimeXBT lowered fees by a factor of 10x on forex and crypto assets offered on the platform. Now, traders can add even more profit to their bottom lines from each trade thanks to reduced commissions. PrimeXBT also offers the ability to take long and short positions – even simultaneously – on all of the assets offered on the platform, providing an opportunity to hedge against any position, and greatly diversify one’s portfolio, lowering overall risk and increasing the chance for success.

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