Developing a Bitcoin Hedging Strategy

Bitcoin prices have cratered since hitting a peak of around $65,000 in November last year.

But it is not only the premier digital currency that has crashed this year. Nearly every major virtual token in the cryptocurrency market has plummeted between 40 and 70 percent over the last seven months.

Some argue that this spells the end of the crypto industry, while others purport that this is a prime buying opportunity for long-term investors. It is unlikely that crypto projects and virtual currencies will vanish into the abyss. Like the dot-com crash more than 20 years ago, this current market crash will lead to a sort of rebalancing, allowing the competent cryptocurrencies to overtake the incompetent.

In the meantime, if you are an active crypto trader, it is essential to develop a hedging strategy to ensure you are protected during these chaotic times.

So, how do you put together a Bitcoin hedging strategy anyway?

Developing a Bitcoin Hedging Strategy

Here are four measures to employ when you are devising a Bitcoin hedging strategy:

1. Short the Crypto Market

Wait a minute.

You are bullish on Bitcoin, but do you also want to bet against the peer-to-peer digital currency?


This is typical in the broader financial markets. If you understand the marketplace, notice patterns, and keep up with the latest news, you will know when assets are coming under pressure.

So, in today’s crypto market, if you understood that rising interest rates would impact prices, you could have shorted Bitcoin and the myriad of other tokens.

But how?

Well, there are two ways.

The first is to short Bitcoin by borrowing from a broker, selling the crypto, and then repurchasing it at a better price.

The second is to buy bearish inverse exchange-traded funds (ETFs). These instruments function as a simple tool to take advantage of the downturn in the market.

2. Buy Dividend-Paying Crypto Funds

The crypto fund facet of the broader financial market is still young, mainly because these types of investments are still facing regulatory hurdles.

That said, there are plenty of BitcoinETFs, with some offering a dividend. One of these is the Purpose Bitcoin YieldETF.

By holding a dividend-paying ETF, you can still maintain a position in Bitcoin while generating an income without abandoning the virtual currency altogether.

3. Dollar Cost Average Your Investment

Dollar-cost averaging is a crucial part of investing. It can help you take cover during turbulent times and enjoy gains during the boom phases.

This trading method consists of regularly buying positions in assets at any period or purchasing dips to lower your average price.

If you are bullish on Bitcoin’s long-term potential in the crypto ecosystem, it would be necessary to dollar cost average down. Whether you are taking a position at $45,000 or $21,000, it would be prudent to purchase closer to the bottom than to the top. Of course, this is easier said than done, but since the market is nearing the bottom anyway, perhaps now would be a good time to dollar cost average down your overall position.

4. Portfolio Rebalancing

Is your crypto portfolio too meme coin heavy? Are your positions all over the place? What is your broader strategy in crypto investing?  

Perhaps the best Bitcoin hedge strategy is to rebalance your portfolio and finally establish a position in projects and coins with exceptional utility. In other words, in addition to holding your money in Bitcoin, you can buy into Ethereum, Cardano, Litecoin, and even stablecoins.

For example, here is what a balanced crypto portfolio could look like:

·      Bitcoin: 60 percent

·      Ethereum: 15 percent

·      Avalanche: 10 percent

·      Stablecoins: 10 percent

·      Speculation: 5 percent  

This is a terrific opportunity to manufacture a more balanced portfolio that can weather the storm and offer long-term rewards.

Is Crypto Still King?

As the old saying goes, the rumours of crypto’s death have been greatly exaggerated.

Although it appears that cryptocurrency might not be the inflation hedge that many had anticipated, Bitcoin and its peers are still not going away any time soon. Indeed, crypto is here to stay, but the correction is creating a new era whereby certain projects and currencies will reach the upper echelon. At the same time, the DoinkCoins and Shiba Inus will be placed into the dust bins of market history.

Bitcoin has been through these types of selloffs and corrections on multiple occasions throughout the last decade. After every time, it has come out better and stronger with more gains. But while it is easy to profit from Bitcoin’s gains, a serious investor can consistently profit from its losses, which is why more sophisticated traders often employ hedging strategies in time of market stress and volatility.

*Disclaimer: This is not investment advice. Bitbuy does not endorse any of the hedging strategies and does offer many of the products mentioned in the article. Cryptocurrency markets are volatile and may not be suitable for all investors. Past success does not guarantee future performance.