From the long bear market of 2018-19 to the “Black Thursday” of 2020 to the recent frequent volatility, the cryptocurrency industry has experienced one setback and challenge after another, but each time it has come back from the fire and each time it has reached new heights. But the question is, as more and more crypto traders find that market volatility is increasing, what can be done to hedge such risks?
Just after cryptocurrency exchange Coinbase successfully completed its IPO on NASDAQ on April 14 under the ticker symbol COIN, the price of bitcoin on that day was buoyed by the positive impact, once approaching a record high of $65,000 and surpassing the market capitalization of several global names such as Facebook. Surprisingly, however, two days later White House press secretary Jen Psaki confirmed at a press conference that President Joe Biden agreed with U.S. Treasury Secretary Yellen’s views on regulating cryptocurrencies. Yellen had called on lawmakers to “scale back” the use of cryptocurrencies during her nomination hearings in January, saying that there is a real need to look at ways to reduce the use of cryptocurrencies and ensure that money is not laundered through these channels. Not only that, but there are also rumors that the Biden administration may introduce cryptocurrency-related legislation in the coming months, as authorities will not tolerate an industry with a market cap of more than “trillions of dollars” going unregulated, while also doubling the capital gains tax rate for wealthy individuals earning $1 million a year.
Industry insiders warn that the Biden administration’s plan to raise capital gains taxes does not bode well for cryptocurrencies and could lead to a market crash. However, some analysts believe that the cryptocurrency market is still somewhat affected by policy risks. According to U.S. taxation rules, bitcoin is subject to capital gains tax if you choose to sell it after holding it for more than a year, and if Biden chooses to raise it to 39.6% it will certainly cause mood swings in the market. But in the long run, cryptocurrencies may not be affected too much because this bull market is very different from previous ones, many cryptocurrency buyers, especially institutional investors, will not exit the market in the short term, and the market will continue to grow and succeed because the U.S. does not have any regulatory regulations that “kill” cryptocurrencies.
As expected, just one week later, Bitcoin took another tumble on April 23 (Black Thursday), with the largest intra-day drop of more than $7,000 and the price dropping as low as the $47,000 range. However, as the market calmed down, bitcoin was back above $55,000 on April 28th. As you can see, Bitcoin is still very sensitive to market factors and policy influences, and this sensitivity is naturally reflected in the “price”.
What can traders do to avoid the risk of high cryptocurrency volatility?
Despite the recent volatility in the bitcoin market due to policy risks, one has to admit that the fundamentals of the cryptocurrency market have been further consolidated today and the market sentiment is indeed different than before. This Black Thursday is likely the cryptocurrency market’s preparation for the next bigger rally, and the possibility of breaking $100,000 cannot be ruled out behind it. Moreover, with the gradual increase in the number of incoming institutional investors including Tesla, Square, MicroStrategy, and South Korean gaming giant Nexon, it is widely believed that the Bitcoin Exchange Traded Fund (BTC ETF) is expected to be approved by the SEC within the year.
However, for cryptocurrency traders and investors, it is important to take precautions in advance and try to choose the most reliable trading strategy to reduce losses in the face of each persistent volatility of a significant magnitude.
In response to the current volatile market, some cryptocurrency exchanges have introduced grid trading services. Grid trading is a relatively reliable trading strategy. By setting a price range and systematically dividing the funds into several equal parts, this trading strategy can mechanically operate on the investment target, buying in different gears when it falls and selling in different gears when it rises, thus effectively reducing the long-term investment costs and accumulating profits in the volatile market environment.
In addition, some leading exchanges have introduced the concept of “AI robots” into their grid trading services. The service supports the use of AI to analyze the user’s trading history, and then provides the user with targeted parameter recommendations, so that the trader only needs to select the trading pair and determine the amount of money to be invested, and the robot can do the rest. After the grid trading is opened, the trading funds will be automatically transferred from the coin account to the robot account, and the trading funds will also be automatically transferred from the robot account back to the coin account after the trading is finished, all the transfers are free of commission. The whole process is popular among users because the operation is very smart and convenient.
In addition, there are also some exchanges that have launched contract grid trading robots. Choosing a contract grid trading robot will result in additional capital fees and grid revenue compared to pure spot trading, with the same high return and low risk. The introduction of such services extends the coverage of grid trading from spot to derivatives. Once a trader chooses a contract grid trading robot, it means that there is no need to understand the complex principles of the contract and it is easy to start trading by entering the investment amount.
In general, the longer the oscillating market, the more effective grid trading becomes. Looking at the historical data of bitcoin price in 2021, the oscillating market has lasted for almost three months from the beginning of the year until now, and from this perspective, this trading operation strategy might be an option.
There is no doubt that grid trading is a means to counteract market volatility, but the crypto market is becoming more sophisticated along with the emergence of more and more crypto derivatives and financial instruments, and other innovative financial instruments and financial derivatives that help to smooth out the high volatility of crypto assets, such as contracts, options, leveraged tokens, etc.
Among them, leveraged tokens, a new type of cryptocurrency derivative, comes with its own leverage, and the trading threshold and experience are more user-friendly as it operates basically the same as spot cryptocurrency trading. Compared to contract trading, leveraged tokens can also amplify investors’ returns. And it is worth mentioning that the price of leveraged tokens does not go to full zero, so there is no risk of being forced to close out positions, which is perfect for most cryptocurrency investors, especially those who want to profit from market volatility but do not want to take the risk of liquidation.
Confronting the unique properties of cryptocurrencies
Although the cryptocurrency market has picked up, the process will not happen overnight and there will be several major pullbacks in the middle, with pullbacks of more than 20% being common in the crypto market.
We need to face the unique attributes of cryptocurrencies: high volatility and speculative nature. Once we are aware of these “special attributes”, it is important to choose a trading strategy or strategies that work for you. There is no doubt that this emerging market has become more and more sophisticated along the way, especially with the support of contracts, options, leveraged token derivatives and other instruments, the quality of cryptocurrency trading is improving, and investors have more and more trading strategies to choose from during price fluctuations, so that even if there are unstable price movements in the short term, they can still rely on a variety of trading strategies to minimize risk and maximize Even with short-term price fluctuations, diversified trading strategies can still be used to minimize risk and maximize returns.
Various tests may still await traders in the future, and more and more people are recognizing that volatility is impossible to avoid in a history of intermittent catch-up, but investing in cryptocurrencies is still rewarding in the long run.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/btc-volatility-is-getting-higher-and-higher-how-to-avoid-trading-risks/
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