How to Navigate a Crypto Bear Market: 5 Portfolio Management Approaches

How to Navigate a Crypto Bear Market: 5 Portfolio Management Approaches

The first half of 2022 has been challenging for crypto investors, with crypto assets prices dropping significantly from their all-time highs of late 2021. But that doesn’t mean investors must leave the market and wait for the next bull market to occur. Read on to discover five portfolio management approaches that may help you navigate the crypto bear market.

Switch Into Stablecoins to Eliminate Volatility

To reduce the volatility of your crypto portfolio, you could move some or even all of your funds into stablecoins that are pegged to stable assets like the US dollar.

Stablecoins – as the name suggests – exist to retain a stable value. That means they’re less volatile than other cryptocurrencies and will – if they work as designed –  maintain the original value of your digital assets even when market prices continue dropping.

Tether USD (USDT), USD Coin (USDC), and Binance USD (BUSD) are market-leading, dollar-backed stablecoins you could consider allocating capital to. All three are backed by US dollars and US dollar-denominated assets held at financial institutions to ensure that the 1:1 dollar peg remains.

Moving funds out of risky crypto assets and into stablecoins will reduce drawdowns, but it also means that you may lose out on the early stages of a turnaround when the time comes.

Go Bitcoin-Only & Buy the Dip(s)

The crypto markets offer a wide range of different digital assets, from digital currencies and layer-1 protocol tokens to DeFi tokens and NFTs.

During times of market corrections, however, Bitcoin tends to outperform altcoins and other digital assets, typically dropping less in price than the rest of the market.

Experts attribute this behavior to the high-risk profile of most crypto assets. They’re less established than Bitcoin and haven’t garnered enough trust from investors. A recent report from Jump Crypto states that about 80% of new cryptocurrencies “are underwater a year after launch, further confirming altcoins’ risky nature.

To reduce volatility, you could, therefore, move all or the majority of your crypto funds into Bitcoin as you wait out the bear market. Moreover, you could “buy the dip” by adding more Bitcoin to your portfolio during price drops if you are convinced of the bright future of the world’s leading cryptocurrency.

To invest in Bitcoin using a regulated, exchange-traded investment vehicle, check out the Iconic Funds Physical Bitcoin ETP.

Move Into High-Quality Crypto Assets

If you don’t want to go Bitcoin-only, you could move funds into established crypto assets beyond Bitcoin. This approach is based on the notion that established crypto assets – like Bitcoin and Ethereum – will likely outperform mid and small-cap coins during a bear market.

The leading crypto assets by market capitalization are generally more established and trusted by the crypto investor community. Moreover, they also have higher liquidity than smaller digital assets with lower market capitalizations, giving investors the comfort of knowing they can exit their positions without much slippage if necessary.


Hedge Your Portfolio with Crypto Derivatives

Hedge Your Portfolio with Crypto Derivatives

If you want to retain your crypto portfolio holdings because you believe they will appreciate in value over the long term, you could hedge your portfolio with crypto derivatives.

In the crypto markets, investors can choose between futures and options to hedge their portfolios.

Hedging with Bitcoin Futures

Bitcoin futures are financial derivatives contracts between two counterparties agreeing to buy or sell Bitcoin at a particular time in the future for a specified price. To hedge your crypto portfolio, you can choose to hedge the entire portfolio or a part of it. Your chosen hedge ratio will determine that. For example, you could hedge half of your investments with futures using a hedge ratio of 0.5.

Let’s look at an example:

Let’s assume you want to hedge 50% of your portfolio for three months via CME Bitcoin futures. The price of the BTC futures contract is $20,200. If Bitcoin and the overall crypto market fall by 25% in the next four months, you’ll buy the futures contract at $15,150, making $5,050 in profit. This gain can cover a section of the losses from the portfolio value drop.

Keep in mind that the correlation between Bitcoin and the other coins in your portfolio isn’t 1:1. That makes it difficult to accurately determine beforehand the percentage of your portfolio you can hedge with Bitcoin futures.


Hedging with Put Options

Bitcoin put options are contracts giving the holder the right to sell Bitcoin at a particular time in the future for a specified price. However, the holder isn’t obligated to do so. Hence, put options offer more flexibility than futures contracts.

Let’s look at an example:

Assume you expect the value of your portfolio to drop by 50% in the next three months. So, you buy bitcoin put options with a strike price of $10,000, which is approximately 50% lower than the current BTC spot price of $20,270. If BTC loses more than 50% of its value in the next three months, the Bitcoin put option you purchased will be “in the money.” The profit on the options position can cover losses from the portfolio value drop. In contrast, you’ll lose the premium you paid to buy the put options if the price of Bitcoin doesn’t collapse in the three months.


Keep Calm & HODL

Finally, you could choose to “HODL” and wait out the crypto bear market.

If you can stomach the volatility and are comfortable with your portfolio holdings, you could hold simply onto your investments.

Crypto investors who lived through the “crypto winter” saw many of their holdings reach new all-time highs during the 2021-bull market. Therefore, a buy-and-hold strategy may pay off for investors with diversified crypto portfolios.



About Iconic Funds

Iconic Funds is the bridge to crypto asset investing through trusted investment vehicles. We provide investors both passive and alpha-seeking strategies to crypto, as well as venture capital opportunities.

We deliver excellence through familiar, regulated vehicles offering investors the quality assurances they deserve from a world-class asset manager as we champion our mission of driving crypto asset adoption.

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