In this last part of the 3-part series, we will dive into the last two hedging methods, the most common ones we hear from retail investors, which is trade and try and perhaps the most rational risk-management method in our view, which is to set up crypto passive income to hedge against the price volatility in the underlying assets.
Strategy 3: Trade and Try to Beat the Market
Day trading is one of the most studied areas in finance. In a traditional financial market, price manipulation is far less likely to happen when compared to the unregulated cryptocurrency market. Yet, empirical data shows that 95% to 98% of all day traders lose money in this regulated market. And then you put together easy price manipulation with the high volatility of the cryptocurrency market, and you have spelled disaster.
What are your realistic odds?
The chances that you will lose money in day-trading on the cryptocurrency market are extremely high and almost certainly so in long-run as a price taker. However, if you manage to get it right, even a few times, your gains may also be astronomically high. It may even take you from being a Price Taker to a Price Maker, provided the stakes are high enough.
As of now, none of the crypto wizards have been able to live up to their promises of a year ago, regardless of whether they were experts in picking promising ICO tokens or wizards in secondary market prop-trading.
After all, what is the chance that you will be among the top 3% of all traders in cryptocurrency? Because they are the only ones actually making money day-trading.
So, unless you have a Ph.D. in a quantitative field together with years of trading experience, this is not the wisest option for you. And those who can actually do it, probably won’t be going around teaching others about it either.
Strategy 4: Passive Income
Passive vs Active investment
Here we assume you are familiar with the basic concept of passive vs active investments. If not, here is an Investopedia one-pager that explains it well.
Photo: Bloomberg News
In 2007 Warren Buffet made a one million dollar bet that a passively-managed index fund would out-perform actively managed hedge funds. In 2017, he won the bet with the passively managed index fund doing 200% better than actively managed hedge funds.
You may not be a Price Maker like Warren Buffet. But, the fact remains that this experiment proved that Price Taker investors are better off trying to rely on passive gains from their investments rather than actively trying to beat the market. This stands true for cryptocurrency as well as other financial assets.
This acts as a natural hedge, think about it: if you get more crypto over time, then even if the crypto value decreases, the blows will be softened.
This is what WhaleLend sets out to do: to device a passive income product specifically for cryptocurrency holders. This is not an easy task, mostly due to the lack of well-functioning loan markets. After all, no one is taking a mortgage out in Bitcoin (at least not yet).
So our team spend more than a year figuring out this problem, what we came up with is a passive, fixed-income saving account for the cryptocurrency. This product provides people with a long-term hedge against the harsh volatility of the cryptocurrency market. It won’t insure your house against fire 100%, but it is the best insurance we know for your cryptocurrency investments.
The WhaleLend savings account for cryptocurrency works much the same as a normal bank account. We have done much more than simply ‘test’ the account with our crypto. We have actually put our money where our mouth is, literally! All of our founders have been using WhaleLend product for the past couple of years with our own cryptocurrency holdings. It had helped us to weather the storm better. You can benefit from it, too.
How does passive income stream hedge price risks?
This example below will show you exactly how the WhaleLend account works. If you had deposited 10 BTC, with the assumed price of $10,000 per BTC, in your WhaleLend account on Jan 1, 2018, you would have earned interest on it for the whole year. On Dec. 31, 2018, at the rate of 10%, you’d have had 11 BTC in your account.
As you can see in this table, a relatively insignificant price drop of $500 can have a significant effect on your cryptocurrency investments. Without Whalelend, you’d be losing $5000, whereas, with WhaleLend, you’d be gaining $4,500!
This following scenario shows you the impact of WhaleLend savings account when the price of Bitcoin increase:
As you can see from this example, your WhaleLend account acts like a Profit Amplifier. Where, without WhaleLend, your investment would have appreciated by $5,000, with WhaleLend, it appreciates by a huge $15,500!
To wrap it all up –
In a nutshell, where there was no real, reliable way for you to hedge against price drops in cryptocurrency before June 2018, WhaleLend has now introduced a great alternative. When the price of cryptocurrency dips, WhaleLend reduces your losses substantially, thus hedging your investment against a bigger loss. At the same time, because of the way the product is structured, in a bull market, WhaleLend amplifies your upside gains and your portfolio value rises by several times more than if it were not with WhaleLend.
WhaleLend gives your cryptocurrency investment, without a doubt, sensible options of hedging against market volatility.
P.S. If you are wondering how we manage to build a savings account for crypto, WhaleLend uses, what is known as Margin Lending, to make all this possible.
To understand the technical nitty-gritty of the financial engineering behind this unique savings account, head over to our article that describes, in detail, the mechanics.