Can Crypto Derivatives Beat the Volatility Trap?

The 2020s have not been a stable time for the markets. When volatility wasn’t a problem, there were long lapses of pandemic-induced business shutdowns that wreaked havoc on consumer income. Even those who wanted to invest were lacking a regular income and were thus unable to do so. Then the supplychain crisis arrived alongside rising inflation.Since the beginning of 2022, both rampant inflation and price volatility in the markets have taken their toll on everyday traders and investors. While it’s nearly impossible to fight inflation, how do trading enthusiasts overcome the rigors of the see-saw, volatile prices in their favorite markets?

One way crypto traders deal with the common threat of big price swings is by using derivatives. Unfortunately, far too many assume that using crypto derivatives is a highly complex affair that comes with high costs and unusual levels of risk. On the contrary, using these unique instruments can be an effective way of reducing risk, saving money, and avoiding the many problems that come with daily price volatility.In addition to the tactical use of derivatives, traders need to know about the pros and cons of the asset group. Fortunately, there are other strategies that work well alongside derivatives to minimize the effects of huge price swings. They include crypto index trading, diversification within the cryptocurrency category, and effective portfolio design. The following details can serve as a starting point.

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What They Are

The perpetual bitcoin futures contract is, by far, the top member of the category. Prices are set to be the same as bitcoin’s, but owners of the contracts do a daily settlement of gains and losses, and they never have to buy any bitcoin. Exchanges provide a credit guarantee, offer high leverage and liquidity, and extremely low bid-ask spreads. The latter is a fear for many people who would otherwise get involved in the marketplace.

Pros and Cons

Cryptoderivatives come with very low spreads and are exceptionally liquid. These are the two most attractive aspects, along with the fact that there is no counter-party risk. Additionally, they come with high leverage, are easy to sell short, and holders do not need to own any physical assets or virtual coins. In short, they come with many of the same advantages as stock derivatives.On the downside, some find these unique instruments hard to understand and thus avoid them. In the financial media, most of the reportage focuses on things like the daily price changes of bitcoin and the common risks associated with holding any crypto in a portfolio.

Using Indices to Dampen Price Swings

Crypto indices operate much as their counterparts do in the equities markets. Exchanges and dealers put together baskets or groups of crypto that have different profiles. Some are majors, like bitcoin or ethereum, while others are minors or not very well-known issues. Some indexmakers attempt to design lists that include hundreds of coins in all subcategories.Purchasing shares in an index can be an effective way to gain exposure to a given group of instruments without devoting a large share of capital to just one or two. For decades, securities traders have turned to the big exchange indices, like the DAX and DOW, to beat choppy markets while acquiring exposure to a large sector of the economy.

The same is true for crypto indices, the most popular being the Crypto-10, which tracks the top 10 coins. It’s an ideal way for people to play the major coins without tying their capital to individual issues. Buying into an index is one way to own a stake in a variety of coins. However, some investing enthusiasts prefer to purchase about a dozen or so coins outright and hold them in online or offline wallets.

Smart Portfolio Structuring

It’s not enough to buy wide within a single asset class like crypto. Investing enthusiasts need to be aware of how their whole portfolio is set up. Does it include too many equities, commodities, ETFs (exchangetraded funds), precious metals, or cash? No matter how many coin issues you own or how diversified your cryptocurrency holdings are, it’s imperative to strive for a balanced portfolio.For most, that means holding a variety of appreciating assets, some of which offer a hedge against inflation and others that can bring solid, long-term returns for retirement or targeted savings. Never assume that just because you own 10 different altcoins, your investments are secure. Wide ownership of multiple types of securities is the best way to deter the effects of huge price swings and unstable markets.

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