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After the extreme volatility of cryptocurrencies, the great market crash in 2022 taught a hard lesson to many. The price of cryptocurrencies had vigorously fluctuated within two years. Many started considering cryptocurrencies a volatile market full of uncertainty and speculation at the time. Bitcoin is the first and largest cryptocurrency based on market capitalization. It experienced massive growth starting in 2020, mounting from $9000 to $69000!
Many people and institutional investors 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 a massive collapse for the whole of 2022. Based on market capitalization, cryptocurrencies fell from an all-time high of $3T to under $1 T, with all coins’ general prices close to 96%.
When cryptocurrencies start heading south, you should sell only some of your investment holdings. However, it would be best to remain keenly aware of their movements and the losses you’re willing to incur. Everyone wants their assets to be fruitful and multiply, but avoiding risk entirely when investing in the markets is impossible. Here are strategies that can help you protect your crypto portfolio from market volatility.
Crypto Volatility 101
Traditional finance defines volatility as the statistical measure of an asset’s price dispersion. In simpler terms, volatility establishes the extent to which an asset’s price fluctuates over time. For example, 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 good or bad. 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. Like risk-averse individuals, some stable value investments more; hence, they avoid high-volatility trades. Crypto traders are often risk-takers and will fall into high-volatility deals easily.
On the other hand, volatility is neither bad nor good from an investor’s standpoint. Investors don’t care about trading to profit quickly but preserving their wealth. So here are some strategies to protect your cryptos from market volatility.
Selling calls on your existing cryptocurrencies can be used to mitigate losses and, at the same time, enhance earnings. In addition, being the seller of a call option can give the buyer of your choice the right to buy your cryptocurrencies at a specific price on 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 the value of 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 for speculative bets or protect your existing position/portfolio. Once you buy puts, profits get generated when the value of cryptocurrencies drops relative to another. In addition, puts offer the buyer the right to sell his cryptocurrencies at a specific price and date.
For example, let’s say you bought a put option for $10 on BTC/USDT with a strike below market price (BTC= $200) of $180 for 28 days, and the price falls 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 only some have a perfect strike price or expiration date. When dealing with crypto, always set 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. Buying a put option protects the assets from downside risk, but you must pay an instant premium. On the other hand, 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. However, 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 exit. As a result, after the market recovers, your portfolio will be more extensive than it initially was, with no additional costs overall. As a result, you will be in a better position than you started.
These strategies can help you protect your crypto portfolio from volatility 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.