At the beginning of this week, most of the large cryptocurrencies weakened and Bitcoin alone lost more than 20% of the value. Confronted with this high volatility, traders and investors need to act fast, in order to prevent more losses. Today we want to talk about three of the best way to hedge during a crypto market downturn, each suited to different conditions.
Assuming what was said last week that 2021 could be a year of boom and bust turns out to be true, market participants will have many occasions when they’ll need to manage rapid selloffs. One of the most convenient ways is via trading CFDs. It’s not necessary to hold the underlying assets and you can sell short, taking advantage of the downside movements.
If you believe that in the long run, cryptocurrencies will go higher, you can hold the tokens in a wallet and use CFDs just to profit from bear markets. The trickiest thing to do would be to time correctly when the market will turn south. During the past few months, we’ve learned that the upside can exceed even the most optimistic expectations.
Buying outperforming altcoins
Despite the synchronized selling that most of the time occurs, not all cryptocurrencies drop at the same pace. In fact, even during a bear market, there are altcoins rising and outperforming the entire market. Even though some losses might show up in the current holdings, you can compensate by generating returns on cryptocurrencies rising. However, even in this case, there are risks involved, since finding the best tokens will be very difficult.
“Sell on rips”
In case a longer corrective move is about to start, another simple way to take cover is by reducing exposure. But it won’t be appropriate to sell when the market is dropping impulsively. Be patient and wait until the market will retrace higher. “Sell on rips” and by doing so, you will be able to bank more profits.
Don’t forget that all these methods are intended only if you have long-term exposure to the cryptocurrency market. Despite the short-term uncertainty spotted in the market, by looking at higher time frames it’s easy to notice these large price action moves. Ultimately, you’ll need the nerve and confidence to act fast and not be affected by other people’s opinions.
Embrace the fact that some situations will be difficult to deal with and unfortunately, losses can’t be avoided. In the longer run, though, with proper risk management and an effective strategy, it is possible to have an edge.