How to hedge Bitcoin and minimize risk during a recession. The Coronavirus pandemic nailed another nail in the coffin of centralized financial systems. Over the past few years, we have seen several countries like Venezuela, Argentina, and Brazil go through a sustained period of unprecedented hyperinflation. This begs the question: Can cryptocurrencies like Bitcoin and DeFi actually provide a safe haven from these wild economic swings? Whether they can or not, one thing that’s pretty undeniable is that the present financial system is completely and utterly broken.
A lesson from Greece
The financial turmoil in Greece has been grabbing the headlines for the better part of the decade. After all, how is it possible that the land famous for being one of the strongest and wealthiest kingdoms of the ancient world has somehow become so exceedingly bankrupt? Well, it all began back in 1981 when Greece joined the European Union (EU). Two decades later, the country adopted the Euro currency in 2001.
In 2008, during the housing crisis, Greece plunged deep into recession and raked up vast amounts of debt. Over the next several years, the country was forced to being repeatedly bailed out by the European Central Bank.
So, how did this affect the common person?.
During the crisis, Greece was forced to shut down the banks for an entire week. As you can imagine, this caused widespread panic among the people since they were unable to withdraw money.
In general, during times of extreme economic turmoil, countries impose heavy restrictions on their citizens. This is why some people have turned to Bitcoin and DeFi as a possible hedge from recession.
First and foremost, let’s look at what gives the currency its value – faith and belief. If people lose belief in the currency, they will simply opt for some other currency. Usually, people tend to adopt the most stable currency. This is why people, in general, will tend to adopt the US dollar, which is a lot less volatile than your Venezuelan bolívar. However, as we have seen, during the 2008 crash and the 2020 pandemic, the US dollar is far from reliable.
So, can Bitcoin truly replace USD? Well, some definitely think so, because of the following reasons:
- Bitcoin is a decentralized entity, as such, a centralized organization doesn’t govern it. Remember that Satoshi Nakamoto created this post the 2008 crisis when public trust towards banks and financial institutions was at an all-time low. Bitcoin presented an alternative method of value transfer, wherein there is no need for you to go through a centralized entity like a bank.
- Bitcoins can be easily accessed via different exchanges online. Anyone can simply scan a QR code to exchange money.
- Bitcoin’s protocol is permissionless and transparent, making it a lot more open than traditional financial systems.
- Several merchants and retails have already started accepting Bitcoin for payments.
Bitcoin’s credibility as a currency during crisis times has been pretty well-validated in recent times.
Bitcoin in recent times
As per studies, during a financial crisis, people tend to opt for bitcoin instead of fiat. As the “Greek tragedy” unfolded, many noticed a positive bump in trading volume. A considerable portion of these new customers hailed from Greece.
Regardless, Bitcoin has a history of positive correlation with financial crises all over the world. Let’s take some examples to illustrate this best:
- In April 2013, cryptocurrencies reached record heights in the middle of the Cyprus banking crisis.
- During the Argentine financial crisis, the government prohibited its citizens from buying US dollars, fearing further devaluation. Undeterred, the Argentines turned to Bitcoin. Reportedly, Argentina soon became a hotspot for Bitcoin activity. The London School of Economics released a report called “Bitcoin Market Potential Index” (BMPI). In this report, Argentina came out as a clear leader, showing that they have an economy where Bitcoin will gain the highest traction.
- As per stats, LocalBitcoins Venezuela has been enjoying record highs in weekly Bitcoin trading volume.
So, this means Bitcoin is a safe haven, right?
The pandemic is the first proper global recession that Bitcoin had to ever deal with. During this period, its performance has been somewhat mixed. When it comes to true valuation, nothing can quite rival Bitcoin. On a 5-year view, Bitcoin’s return dwarfs every other dominant asset class in the world.
As per the graph above, from June 26, 2015, to June 26, 2020, Bitcoin enjoyed an ROI that was 70X higher than Financial Times Stock Exchange 100, NASDAQ, Nikkei, S&P 500, and Dow Jones markets. During this period:
- Bitcoin went up from $257.06 to $9,143.58. That’s a 3,456.98% increase n ROI.
- The average ROI for all the indices was 49.27%.
However, the rise in valuation is just one aspect of a safe haven asset. Along with all this, the asset needs to be less volatile, more liquid, and easy to transact with. Bitcoin clearly doesn’t tick these boxes. However, it should be noted Bitcoin is still a very young asset. With increased use case and friendlier regulations, Bitcoin is bound to become a much more mature and stronger asset. As such, you should definitely make “buying bitcoin” your top priority.
What about DeFi as a hedge?
Alright, so we have looked at how Bitcoin can potentially be a hedge against a financial crisis. So, what is DeFi or decentralized finance? It is an idea and a thought process that creates decentralized versions of traditional financial instruments. Eg. Compound is a DeFi version of a money market fund that allows users to earn interest.
So, why is DeFi considered a valid hedge? It is because of its design and the philosophy governing it. DeFi is decentralized, global, and ideally should be free of friction. In a decentralized lending platform, you don’t need to have a good credit score or credit history to apply for loans. Risks can be covered via collateral. If you already have a good stock of Ethereum (check out this “What is Ethereum” guide to know more about it) then it makes complete sense to grow them by locking them up in DeFi applications.
Let’s look at some DeFi applications that can be used during times of financial distress to make the most out of a bad situation.
Set Protocol is a DeFi protocol built on top of Ethereum, which allows users to create, manage, and trade Set – ERC20 tokens, representing a portfolio or a basket of tokens. The Set Protocol captures sophisticated trading strategies to operate and rebalance these portfolios. These trading strategies include indicators like the Moving Averages, etc.
So, why is this important? TokenSets regularly offer a large number of assets that have systematically outperformed the market every week. In other words, traders are allowed to make the most out of their investments. Eg. Before the coronavirus crisis, the Sets rebalanced to stablecoins to Dai and USDC to minimize losses.
An Ethereum-based token trading platform that allows users to tokenize real-world assets, like stocks and shares. Users can short several Ethereum-based assets in tandem with protocol tokens like Tezos (XTZ) and Binance Coin (BNB). This can be very useful in a bear market.
Founded in mid-la te 2017 by Antonio Juliano, dYdX is a hybrid platform that offers an innovative approach to margin trading. dYdX can offer margin trading via the following:
- Isolated margin: Isolate a specific amount of funds with certain leverage. Investors can decide how they need to lock up as a deposit based on the leverage.
- Cross margin: Use all the assets in your dYdX balance as collateral to earn higher interest rates.
Users in dYdX can open up a short with up to 5X leverage that can be monitored on chain.
Curve can be thought of as a decentralized exchange (DEX), that allows you to exchange stablecoins through low fees and low slippage. Curve uses liquidity pools wherein the users themselves provide the liquidity.
How does Curve work:
- It aggregates stablecoin pools to offer minimal slippage when trading between various stablecoins.
- It gives you easy access to assets, especially when they are in high demand.
Leveraging automated portfolios
Another interesting technique that you can use to hedge your risk and thrive during a recession are automated portfolios. Currently, eToro has an impressive range of premium portfolio offerings called “CopyPortfolios.” The CopyPortfolio acts like multiple traders that are working for you simultaneously. The minimum amount required to invest in CopyPortfolios is $5,000.
Before we go any further, you should know that each person or market under a CopyPortfolio is counted as a single trade, and each trade opens up for you with the same proportional amount.
Alright, so now let’s look at the three types of CopyPortfolios that you can choose from:
- Top Trader CopyPortfolio: A trader-only portfolio, where each of the traders that are being copied as part of the portfolio, are selected based on the CopyPortfolio’s strategy.
- Market CopyPortfolio: These portfolios are a combination of CFD stocks, commodities, or ETFs that are bundled together as per a predefined theme.
- Partner CopyPortfolio: EToro’s partners have built this portfolio – Tipranks (a stock analyst software company), WeSave (a French robo-advisor), and Meitav Dash (a multi-billion dollar investment house).
How does CopyPortfolio rebalancing work?
Your CopyPortfolio will automatically rebalance itself to help traders optimally diversify their portfolio while minimizing long-term risk. This periodic rebalancing empowers the users to get the most out of different trading strategies. The weight of each within the CopyPortfolio is proportional to the size of its market cap.
Example of eToro Copyportfolio – The TIE
The TIE and eToro have partnered up to launch TheTIE-LongOnly CopyPortfolio.
The TIE was built with the mission of bringing trusted and transparent data and technology solutions developed for the next wave of cryptocurrency trading.
The TIE’s core offering is the most advanced data analytics platform in cryptocurrency combining proprietary sentiment, market, fundamental, technical, and on-chain data.
The TIE’s Crypto strategies were developed to harness the crowd’s knowledge (sentiment). They parse through 850,000,000 tweets every day using proprietary machine learning and natural language processing technology to derive sentiment on cryptocurrencies.
eToro and Delta
Etoro had also acquired Delta, a crypto portfolio tracker app. The Delta app helps investors make better decisions regarding their crypto investments by providing tools such as portfolio tracking and pricing data. It has support for more than 6,000 crypto assets from more than 180 exchanges and provides investors with a range of tools to track and analyze their crypto portfolios.
Conclusion How to hedge Bitcoin and– What should I do?
This begs the question. What can you do the next time you face a major recession?
- If you are a novice investor, then the safest thing for you to do is to just invest in Bitcoin. Bitcoin has proven itself to be an excellent investment and a brilliant hedge (as mentioned above).
- If you are somewhat well-versed in the art of investing and cryptocurrencies, then you might want to experiment a bit with DeFi protocols. While it may seem daunting in the beginning, it can be pretty simple once you get used to it.
- Finally, regardless of your experience, you can always leverage automated crypto portfolios and enjoy huge ROI.
Ready to get started? eToro is one of the simplest to use crypto exchanges available in the US, and yet it’s also one of the most feature-rich as well. Easily and quickly buy, sell, and trade the world’s most popular coins. You can also connect with millions of other crypto traders, and copy their moves automatically with CopyTrader™. If you’re feeling timid, use Virtual Portfolio, which operates exactly like the real marketplace, except that you get to trade with $100k in “play” money. Don’t wait — sign up for eToro today.