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Anyone have thoughts on best ways to hedge crypto positions / profits?

Nigital Domad

Nigital Domad

Mentor Group Gold Premium
Oct 6, 2024
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London
#1
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Hello comrades! I hope many of you are finding yourselves with large paper profits during the current cypto bull run.

I would like to ask the hive mind: What are some good ways you've found to protect / insure those paper profits? I have found some crypto exchanges which have Options trading (where you can buy protective Puts and such), but these type of vehicles do not seem to function the same way Put options in global stock markets function (where you can actually "put" your crypto to the seller of the Put upon exercise).

And Futures trading seems to be only for short term market hedging.

Other than Protective Put Options, has anyone found any other reliable ways to purchase long-term protection or insurance for your cyprto gains / positions?
 
#3
JohnnyDoe said:
European style options are the norm, but otc desks can sell you American style ones.
Anyway, are you sure to understand what your are doing and how to price the contracts?
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I'm pretty sure I know what I'm doing (famous last words, right?)
I have extensive experience with Puts options in regular equity markets (where 1 option contract equals 100 shares). But since crypto contracts for btc, for example, typically equal .01 btc, it gets harder to figure out what is actually being bought. Does each contract actually control .01 btc? That's what the derivative seems to suggest.

Would you agree that protective Put options are the best way to protect a BTC portfolio, for example? Or are there are derivatives you recommend?

Any good tutorials on the web that help explain the elements of the options trading platforms (not the Greeks, those seem fairly similar to equity markets...unless they're not?)
 
#8
Nigital Domad said:
And you would just let it keep running and collect the funding?
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yeah, until I think the downside is done.

Nigital Domad said:
Could you leave a Futures bet running for weeks or months like that (like you could Options?)
Click to expand...

yes, perpetual contracts have no settlement date. Options expire at some point tho so you cannot have them run 'forever'.
 
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#10
Nigital Domad said:
Would you agree that protective Put options are the best way to protect a BTC portfolio, for example?
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a put with strike 20% below the current price will eat up 5% of your portfolio. Total nonsense for 5 btc unless you have other reasons such as taxes.
Nigital Domad said:
Any good tutorials on the web that help explain the elements of the options trading platforms (not the Greeks, those seem fairly similar to equity markets...unless they're not?)
Click to expand...
This question means that you should not touch derivatives. If you are worried for some (nonsensical) reason about the btc/usd exchange rate going down, reduce the size of your 5btc portfolio.
 
#14
@JohnnyDoe I think the lines of thought got mixed up here. I am only talking about BUYING protective puts for a larger portfolio of BTC (5 btc was just an example. Let's assume its 30 for this discussion.) Selling Puts is definitely gambling.

And the part about Futures was in response to CryptoAnts suggestions above (which I am realizing will not make sense for leveraged protection because one would be putting up as much to protect their portfolio as they have in their protfolio at 1x).

So that brings us back to the original question: how would you suggest hedging a larger portfolio of BTC? It seems one could put up 10% of their portfolio to insure the rest of the portfolio using ATM Puts 9-10 months out. Then all that needs to happen is for BTC to rise more than 10% in the next 9-10 months (which all know it will), and you've made back your hedge plus whatever else BTC rises to. And if it doesn't you collect the difference 9 months out if BTC his a down cycle.

Or is your suggestion not to hedge at all because we know BTC will always rise in the long term, so why waste the money hedging? What about the down years in between the pumps? Would you suggest just riding those out, never hedging?

Thank you in advance for your insights!
 
#15
TheCryptoAnt said:
yeah, until I think the downside is done.



yes, perpetual contracts have no settlement date. Options expire at some point tho so you cannot have them run 'forever'.
Click to expand...
Thank you again for the suggestion. I realize I did not specify that I was looking to hedge with the type of leverage that options provide (where you can insure 100% of your portfolio by spending 5-10% of it on protective puts). So 1x Futures won't work for me because you have to put up as much as you actually own just to insure things.
 
#16
Nigital Domad said:
So that brings us back to the original question: how would you suggest hedging a larger portfolio of BTC? It seems one could put up 10% of their portfolio to insure the rest of the portfolio using ATM Puts 9-10 months out. Then all that needs to happen is for BTC to rise more than 10% in the next 9-10 months (which all know it will), and you've made back your hedge plus whatever else BTC rises to. And if it doesn't you collect the difference 9 months out if BTC his a down cycle.

Or is your suggestion not to hedge at all because we know BTC will always rise in the long term, so why waste the money hedging? What about the down years in between the pumps? Would you suggest just riding those out, never hedging?

Thank you in advance for your insights!
Click to expand...

What is ATM? Do you mean ITM or OTM? Or when strike is equal to underlying?

If you want to hedge your spot position simply purchase a PUT (ITM) with an expiry of one year - when you do this, you will pay a premium. One of the following scenarios will occur.

1. Bitcoin rises, your contract loses value or becomes worthless. You paid a premium for this "insurance policy" but the appreciation in value could either cover it completely or partially.
2. Bitcoin tanks, the value of your contract goes up, you can either a) sell it to another participant before expiry or b) exercise on expiry and collect the settlement.

No need to over complicate things.
 
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#18
Silverlake said:
What is ATM? Do you mean ITM or OTM?

If you want to hedge your spot position simply purchase a PUT (ITM) with an expiry of one year - when you do this, you will pay a premium. One of the following scenarios will occur.

1. Bitcoin rises, your contract loses value or becomes worthless. You paid a premium for this "insurance policy" but the appreciation in value could either cover it completely or partially.
2. Bitcoin tanks, the value of your contract goes up, you can either a) sell it to another participant before expiry or b) exercise on expiry and collect the settlement.

No need to over complicate things.
Click to expand...
Hi there, yes! ATM means At The Money. And I totally agree with what you write here. That is what I am currently doing. We are saying the same thing :)

So the crux of my question is: have you (or anyone) found OTHER ways (beyond buying protective puts) to insure their crypto portfolio against the wild swings or the down years? Or is the only solution just Buying long term Puts like it is in typical equity markets?
 
#20
Nigital Domad said:
Just seeing if you (or anyone) have heard of or used other interesting ways to hedge longer term, beyond the use of the standard long term Put approach :)
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Buy UUP etf or DX futures
 
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