Crypto trading has created nouveau riche millionaires overnight; BTC’s return is up 44.67% year-to-date (YTD), while several cryptocurrencies, such as the $PEPE meme coin, have gained over 560% within the past year.
Although impressive, these figures are merely a fraction of the returns traders have generated during crypto market bull run years such as 2017 during the ICO mania and more recently in 2021’s DeFi summer.
But there’s a catch: for every winner, there is a loser. Crypto trading is a zero-sum game, which means that for a trader to make money, another trader on the opposite side of the trade loses their money.
And in extreme industry-specific events such as China’s crypto ban, Luna’s collapse, and FTX’s collapse, more traders often end up on the losing end. To provide some context, Luna’s collapse resulted in a $60 billion loss of user funds, but the losses did not stop there. By the end of the tumultuous 2022, FTX’s insolvency had worsened the situation, pushing BTC’s yearly return down to 62%, while altcoins experienced much stronger drawdowns.
So, how does one survive such a volatile market? On one hand, you can make fortunes in a day, as was the case in 2021 when Tesla founder and billionaire, Elon Musk, was hyping $DOGE coin. On the other hand, all could be lost within a whisker.
One word to avoid being caught in the midst of all these highs and lows: Diversification.
Why Crypto Traders Need to Diversify
Some traders may argue that all you need is an asymmetrical bet to join the three commas club. Of course, this might be the case to some extent, but true to the typical bell-curve distribution, only a handful of crypto traders have become billionaires solely by trading digital assets. Even the best in the traditional stock market have their funds invested across several asset classes.
While on this topic, it is particularly interesting to observe that there periods when Bitcoin and the larger crypto market have been outperformed by traditional assets. For example, in Q2 2024, the S&P 500 recorded a 4.3% gain, Nasdaq Composite was up 8.5% while BTC was down 13.64% during the same period.
These figures are just for one asset class; the stock market. Other types of investments, including precious metals such as Gold have also proven to be a potential hedge for volatile assets like crypto. As of writing, Gold is up 12.65% YTD, but more importantly, it has been very steady compared to the unpredictable crypto prices.
The Art of Diversification
You may be wondering, what does a well-diversified portfolio look like? For starters, it is worth noting that everyone has a different risk appetite and ability. This means that the amount of risk trader X may be willing and able to accommodate is not the same as that of trader Y. Therefore, there is no standard diversified portfolio; it all depends on the risk profiles of a specific trader.
That said, there are several assets through which one can hedge crypto volatility. One of the most efficient financial instruments for diversification and risk hedging in today’s market are derivatives.
Although a bit complex, financial derivatives institutions such as Multibank Group are making the access to this asset class more seamless. This global derivatives provider serves over 1 million traders, spanning across five continents. However, what stands out about MultiBank is its interest in bringing regulated derivatives to the crypto market. The Group recently launched a crypto derivatives trading platform, Multibank.io, featuring up to 100x leverage.
Introducing derivatives as an instrument in the crypto industry is a game-changer for the traders looking to customize their oppositions. Unlike spot trading where one is limited to simply buying or selling, it is possible to take up larger positions or bet on whether the market goes up or down through derivative contracts dubbed ‘futures’.
Another option to diversify one’s portfolio is through the cliche traditional assets mentioned in the previous section. Today, you don’t have to go through a broker to purchase stocks, apps such as Robinhood have made this possible within a few clicks of the button. This is why we have seen several instances where retail is challenging Wall Street’s old guard by pumping meme stocks, as was the case in the Gamestock short squeeze.
Last but not least, a bit of forex trading wouldn’t be bad for one’s portfolio. Global currencies have a tendency to fluctuate depending on the state of a given economy. More importantly, there is no single moment when all fiat currencies are performing the same; there’s always one gaining against the other.
So, when crypto is on an overall downtrend, there are definitely opportunities in the Forex market to speculate on FX movements based on prevailing macro conditions like the Consumer Price Index (CPI), an inflation measure, or other country-specific factors such as political stability.
Conclusion
Trading global markets is an art. While it may seem like an easy endeavor, it requires a tactful approach for any trader to make the most of it. This is especially true for the crypto market, where it is not unusual for gains to be erased within a single one-minute candlestick.
The only and best way to play this game is by keeping in mind the options available to diversify one’s portfolio for more gains or reduce risk exposure. As highlighted in the section above, this can be done by seeking access to other financial instruments, including derivatives, stocks, commodities, and precious metals, among other assets.
