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Home Opinions Op-Eds

How to hedge your crypto holdings against dips as SOL plunges almost 17.8% in one week

Opeoluwa Dapo-Thomas by Opeoluwa Dapo-Thomas
December 27, 2024
in Op-Eds, Opinions
Crypto trading volume declined by 21.8% in June marking third month of decline
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In 2024, we finally began to see acceptance of digital currencies by traditional investors and governments.

With the launch of the BTC ETF by the world’s largest money manager Black Rock and the news of the proposed creation of the Bitcoin Strategic Reserve by the Donald Trump administration, digital currencies may have finally become real assets.

However, one thing still reminds one of their unstable nature; volatility.

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One would fail to understand just how volatile cryptocurrencies can be until they are compared to other assets.

On November 11 2024, Bitcoin ran higher by 10.29% in a single day. The DJI is up 13.4% since the beginning of the year. On that same day, Gold only managed a 2.86% plunge. In the week between December 15 and December 22 2024, Solana dipped 17.8%.

To go a notch further, Bitcoin is arguably one of the most stable digital assets out there. On November 10 2024, Shiba Inu was up 27.43%. Fast-forward to December 9 2024 and the coin shed 15.24% in a 24-hour period. It is this volatility that makes skilled investors warn against leverage trading in the crypto market.

For lack of better words, crypto leveraged trading is like walking a tightrope over the grand canyon. A small slip and its lights out. Literally!

That being said, there must be a way to hedge against this volatility in the markets. Historically, investors have mitigated risk by investing in another asset that moves in exactly the opposite direction of the main asset invested in. For example, an investment in the US equities market can be hedged with investing in US Dollar or US government securities because historically when one climbs higher, the other plunges.

Futures is also a great way of hedging against volatility. Originally a way for farmers to hedge against the volatility of farm produce during planting and harvest time, it is a great way to protect capital against volatility.

Let’s go into detail on how these and many more work.

1. Hedging with futures trading: Futures trading as we know it was pioneered in The Dojima Rice Exchange, established in 1697 in Osaka, Japan. It was the world’s first organized futures market. It played a pivotal role in shaping the landscape of modern financial markets.

In the cryptocurrency market, investors can invest in the spot market which is similar to over the counter transactions or in ETFs. These markets are offered by decentralized exchanges DEXs like Binance or through ETFs like the Blackrock BTC ETF. Crypto futures are another market altogether offered by DEXs where the futures price is closely tracked to the spot price.

To understand futures trading, investors must recognize that they can trade both sides of a market. The long and short side. In other words, predicting that the market can go up or down.

Let’s look at a hypothetical hedge for a BTC spot buy of $10,000. If an investor buys $10,000 worth of BTC at $90,000 per token he accumulates 0.11BTC. If BTC dips to $80,000 per token, his portfolio is down $1,111. The investor can avoid this by opening a leveraged futures short position with a factor of one (1X) that profits as BTC dips. If BTC dips to $80,000 as in our earlier example, his position would be up $1,111. This leaves the total portfolio position at break even thereby hedging against risk. 

2. Hedging by Dollar Cost Averaging DCA: Dollar Cost Averaging DCA is a method of buying an asset at regular intervals over an extended period of time and at different price levels. This is a direct opposite of the lump sum investment strategy where an investor puts in a lump sum at once into an asset.

DCA is a way to mitigate risk because the absolute price for an asset is greatly reduced. Let’s look at buying ETH for example. Let’s say an investor has $10,000 set aside for investing and the current price for ETH is $4,000 per token, they can invest in four batches of $2,500 each whenever ETH dips by $500. This means the investor buys at $4,000, $3500, $3000 and $2,500. This brings the average price to $3,250. This means every buy lower is a hedge to mitigate risk.

Although there are several arguments for and against DCA, it can be a practical hedging strategy if applied properly. The only big risk in a DCA strategy is knowing when to stop buying. Say ETH dips all the way to $1500 as with our earlier example, what does the investor do? Do they keep buying? Practically, who is to say a digital asset cannot go to Zero? We have seen many digital assets “vanish” so DCA must be done by experienced experts and with assets that are considerably stable and sustainable.

3. Hedging by diversification: Another form of hedging is investing in a different asset class or an inversely correlated one. In 2024 for example, a great hedge against cryptocurrency volatility would have been investing in the Nigerian equities market. This year, despite the stellar cryptocurrency run, a handful of Nigerian stocks have outperformed Bitcoin this year. Oando is up almost 400% more than BTC this year alone.

While diversification may be tempting as a strategy for hedging, investors must be weary of the assets they invest in else they may find themselves in double jeopardy. 


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Tags: crypto holdingsSOL
Opeoluwa Dapo-Thomas

Opeoluwa Dapo-Thomas

Dapo-Thomas Opeoluwa is a British-Nigerian International Financial Analyst. He has vast experience in managing portfolios across Africa, Europe, and Latin America, with strong interests in Crude Oil, Cryptocurrencies, and Financial Markets. Find all his articles here https://nairametrics.com/author/opeoluwa-dapo-thomas/ You may contact him via his email - opeoluwadapothomas@gmail.com.

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