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Hedging Strategies for the Crypto Bear Market

Hedging Strategies for the Crypto Bear Market

key takeaways

  • There are several ways to protect a portfolio during a bear market. The objective is to limit losses and volatility.
  • The crypto market has been on a downward trend since mid-November 2021.
  • Phemex has many resources to help investors learn about defensive strategies.

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Bear markets are an essential part of investing. In crypto, they are usually more intense due to the volatile nature of the industry. As a reaction, many investors sell at a loss or buy the next hot token in hopes of a quick recovery.

What they should be doing instead is hedge, making additional investments that limit losses from their existing investments. For example, if you hold bitcoin and its price falls, hedging can reduce your overall loss.

Are we in a bear market?

Since its peak in mid-November 2021, the total cryptocurrency market cap has experienced significant drop,

take bitcoin. Once considered a hedge against inflation, and compared to regular gold, its recent price action has shifted closely. Correlation with Nasdaq 100,

what does this mean? Bitcoin is a “risk-on” asset. And as a result it is sensitive to interest rate fluctuations both up and down.

Normally, the Fed raises interest rates to fight inflation. Consumers borrow less and limit spending, which, in turn, It causes a drop in the prices of financial assets such as cryptocurrencies.

During periods of rising interest rates, investors typically park their assets in yielding instruments like bonds. The opposite occurs when interest rates fall, typically rewarding investors who invest in riskier assets.

With the recent announcement from the Fed federal funds rate hike By 75 basis points (the biggest one-month increase in 28 years), many crypto investors’ portfolios have suffered a setback.

Year-over-year changes in the dollar value of gold and bitcoin and the Nasdaq Composite. Source Now he

But it’s not all doom and gloom. There are ways to make it come alive in the next bull market. The following section describes a set of hedging strategies to help crypto investors protect their portfolios: short selling, increased stablecoin risk, options, yield farming and dollar cost averaging.

short sell

Short-selling allows investors to profit when crypto prices fall, Its purpose is to return previously borrowed assets (cryptocurrency in this case) to a lender and pocket the difference. Unlike a long position, where the upside is unlimited, profits are limited to the minimum value of the asset.

Increasing stablecoin exposure

Although not completely risk freeStable currencies allow investors to avoid volatility by linking their value to, typically, fiat currencies. While holding positions in stablecoins, investors can earn passive income by depositing their coins using DeFi applications or by depositing their tokens on centralized platforms or exchanges. Use caution though, as “excessive market conditions” can take over the platform. stop withdrawal,

crypto options

Option contracts come in two flavours, calls and puts, Traders can protect long positions by buying put options. A put is a type of contract that allows the buyer of the agreement to sell a specific asset at today’s price during a later date.

In other words, buying a put contract is like buying portfolio insurance. This gives the opportunity to sell the falling token at a predetermined strike price.

Another possibility is to sell call options. Here The seller receives a premium for agreeing to deliver the underlying asset for an established price before a specified date if the buyer demands it.

produce farming

Produce Farming is a process where users can earn rewards by pooling their crypto assets together. Other users can use the cryptocurrencies added to these pools, which are controlled by pieces of software (known as smart contracts), to lend, borrow and bet.

application like convex finance either gymnast Can offer APYs anywhere from 5% to 11%, rewarding users who deposit their BTC, ETH and stablecoins.

dollar cost averaging

Dollar cost averaging can reduce the effects of volatility as asset purchases are spread out over time. The advantage of regularly buying during market downturns is that it ensures higher returns if the asset is placed in a bull market.

conclusion

Although the crypto market is in panic mode, there are still Effective strategies to protect and even grow your crypto stack. to visit Femex Academy to learn more.

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