The last few weeks have been a rollercoaster for crypto investors. Global economic woes combined with Russia’s invasion of Ukraine have rocked global markets, and crypto wasn’t spared.
Let’s take a look at five ways inexperienced crypto investors can weather the markets during this crazy time.
Move into safe-haven assets
If the market’s current volatility is scaring you, arguably the easiest thing to do is to move your digital funds into assets that are considered to be safe-haven. However, it’s important to understand that even safe-haven assets only decrease risks and do not eliminate them. In either case, in the crypto markets, safe-haven assets would be stablecoins (for the very risk-averse), gold-backed tokens, and bitcoin (BTC).
While crypto investors are typically not fans of fiat currencies, moving your funds into stablecoins like tether USD (USDT) or USD coin (USDC) should prevent losses from a significant correction in the crypto markets. Yes, US inflation is growing but it’s not likely to affect your portfolio if you hold your funds in dollar stablecoins for a few weeks.
Alternatively, you could move some or all of your funds into gold-backed stablecoins. Gold has been performing well since the start of the year, cementing its position as an inflation hedge and safe-haven asset during times of geopolitical crises.
Finally, you could also move your portfolio into bitcoin. Yes, bitcoin regularly acts like a risky asset, but when the war broke out in Ukraine, bitcoin outperformed many major cryptoassets, and, after a couple of volatile weeks, is trading higher than on the day the war started.
Move into stablecoins and buy the dips
If you believe that the crypto markets will continue to rally after this volatile time period, you could move your funds into stablecoins and start buying the dips to rebuild your digital asset portfolio.
Buying the dip refers to investing in a digital asset every time it drops in price. The thought behind that is to get in while it’s cheap(er) as opposed to making a large one-off investment in the asset.
This approach could allow you to slowly rebuild your portfolio at potentially good entry levels, which could pay off nicely when/if the crypto market continues to rally again. However, as the market demonstrated on multiple occasions, it might keep dipping longer than you would like to.
Dollar-cost average (DCA) and “chill”
Arguably one of the best ways to invest in crypto during times of high market volatility is to dollar-cost average bitcoin or any other cryptoassets you believe will increase in value over time.
Dollar-cost averaging bitcoin involves buying a fixed amount at regular intervals regardless of what price the cryptocurrency is trading. The idea behind this investment strategy is to smooth out market volatility by buying small amounts at regular intervals, thus investing in BTC at an average price.
Crypto investors who dollar-cost average use dedicated DCA apps, most of which allow you to automatically invest in bitcoin using recurring bank payments. Alternatively, you could also DCA other digital assets by setting a specific day each month or week to manually buy a predefined amount at those intervals.
Hedge with crypto derivatives
If you are comfortable exploring the world of derivatives, you could use crypto derivatives to hedge your portfolio and mitigate losses.
Crypto derivatives, such as futures and options on BTC or ETH, enable investors to hedge their digital asset portfolios by acting as a form of insurance against dropping prices.
For example, you could short bitcoin futures to make a profit on your futures position if the market (and the value of your crypto portfolio) drops significantly, offsetting the losses with the derivatives position.
Futures are fairly straightforward and available on most leading crypto exchanges. However, you will still need to calculate the hedge ratio of your portfolio to ensure you are covering losses during times of high volatility.
Alternatively, you could also hedge your crypto portfolio with options on bitcoin or ethereum (ETH). However, options trading is more complex than futures and may be too challenging for inexperienced investors.
Those willing to put in the time to learn, however, could buy a BTC put option that will be “in the money” at a specific price, at which point the options position would offset losses if the value of your crypto portfolio drops significantly. Again, calculating the hedge ratio is essential when using options or any other kind of financial derivative to hedge your portfolio.
The old HODL “war cry” that Bitcoiners cite on a daily basis could actually be good advice during volatile times, especially if you are holding high-quality digital assets, such as BTC.
If you are confident about the long-term performance of the digital currencies and tokens you are holding in your portfolio, you could just keep “HODLing” them and wait out this volatile period before you make any adjustments to your portfolio.
If your portfolio is largely composed of bitcoin, then that’s probably the best thing to do.
Whatever you choose to do, remember that volatility is part of the game in the global crypto markets. Your digital asset portfolio can easily go up or down 10% or more from day to day. That’s normal in crypto.
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