Bitcoin investors were hammered by the price drop and the bearish trend that has been overwhelming the market over the past 3 months. The high volatility of bitcoin is a giant hurdle that limits the acceptance of bitcoin as a currency because the price of a currency must be stable enough in order to be suitable for use on a wider scale. On the other hand, the high volatility of bitcoin can be tempting to a large number of traders who believe that “With big risks come great profits”, so how can we minimize losses secondary to bitcoin price drops?
Looking Into Bitcoin’s Volatility:
A close look at coinmarketcap’s (BTC/USD) charts will help you identify the extremely high volatility of bitcoin price. Throughout the past 6 months, bitcoin price traded between a high of $440 and a low of $193; a wide range that can be very risky to bitcoin investors. Accordingly, one who have bought bitcoin for around $437 on the 13th of November, 2015 would have lost around 54% of capital 2 months after when bitcoin price dropped to around $194.
It is quite clear how the volatility of bitcoin can hinder the acceptance and popularization of the world’s first cryptocurrency. On the other end of the spectrum of investors, there are some who have bought bitcoin for $15-25 way back in 2012 to sell it for hundreds of dollars a year or so after. Bitcoin is not something that you would buy and then sell a few days later; instead, it could be thought of as an investment commodity that you buy and hold for months or even years.
Hedging Bitcoins:
Currency hedging is an act that involves creating a special form of financial contract to protect against predictable or unpredictable variations in the exchange rate of a given currency. Many businesses and investors use currency hedging to minimize the risks encountered when conducting international business deals. Hedging is a form of an insurance contract that minimizes the risk of currencies’ volatility.
Some bitcoin exchanges now offer hedging contracts on their trading platforms through bitcoin-fiat currency swap contracts. TerExchange LLC even managed to register its bitcoin hedging contracts with the U.S. Commodity Futures Trading Commissions. For instance, someone who is looking to lock in the current bitcoin price can buy a hedging contract from a buyer who is willing to buy bitcoin at the same price after 1-3 months.
A great idea would be to create bitcoin hedging contracts and register them on the blockchain. All bitcoin transactions are recorded on the blockchain which can also be used to prove the existence of bitcoin hedging contracts using special coding techniques. The blockchain can also be used to put the value of contracts in escrow to guarantee security for all parties involved in a given contract.
Although bitcoin hedging contracts can protect against price drops, it prevents you from gaining any profit when the price skyrockets. If you bought bitcoin for long term investment, it won’t be logic to lock in its price via hedging and deny probable profits. On the other hand, bitcoin hedging contracts can be suitable for merchants who accept bitcoin payments for their merchandise. If a merchant didn’t change his/her received bitcoins and bitcoin price dropped the following day, he/she may lose all profits gained. In such case, hedging can be an appropriate solution to those merchants.
Buying Altcoins With Your Bitcoins:
Buying certain altcoins with your bitcoins can not only help you stabilize the value of your bitcoins, it can also help you gain some decent profits over your investments. Although a few altcoins can be bought with fiat currencies, most altcoins can only be bought using bitcoin. Accordingly, when you buy altcoins, you can exchange them back to bitcoin whenever you want.
As a cryptocurrency trader, I believe that buying altcoins can be the best way to gain some profit when bitcoin price is falling. Many altcoins have a relatively fixed price range, so you have a high chance of gaining decent profits if you choose a good entry point for your trade. For instance, reddcoin has been trading between 9 and 11 satoshis throughout the past 3 months, so buying at 9 and selling at 10 or 11 can be an easy profiting trade to setup. Furthermore, dogecoin is a very stable altcoin as it has been trading between 57 and 61 satoshis since October, 2014, so it can also be a good altcoin to invest in.
On the other hand, there are some other highly volatile altcoins that can be traded by more experienced cryptocurrency traders to nail down some high profits. For example, the price of potcoin has been ranging between 1200 and 400 satoshis during the past 6 months, so by doing a simple calculation, one can conclude that you can make at least 100% profit by trading potcoin wisely. Personally, I managed to make around 8% profit by buying and holding potcoin for less than 72 hours as shown by the below snapshot.
Litecoin has also been highly volatile during the past 6 months, yet it can be used to make some decent profits. I managed to make around 12% profit by buying litecoin with bitcoin, holding for about 3 weeks and then selling litecoin again for bitcoin as shown on the following snapshot; I bought litecoin at around 0.00640000 BTC and sold it at 0.00757815 BTC so I made exactly 11.8% profit.
Trading altcoins is can be very risky when you don’t know what you are doing. You have to follow price charts closely and regularly go through technical analyses of the coins you are trading. Use our daily price analysis of bitcoin and other altcoins as a guide to help you stabilize the value of your bitcoins or even make some decent profits.
Conclusion:
The relatively high volatility of bitcoin can is one of the main reasons some people are reluctant to use bitcoin. Although bitcoin hedging contracts can help protect against losses, it deprives you from the profits you can gain when bitcoin price soars. Trading altcoins carefully is the best way to make good gains on your bitcoin investments.
References:
- Crypto-Currency Market Capitalization http://coinmarketcap.com/
- Cryptsy: cryptocurrency exchange platform http://cryptsy.com
- Bitcoin is growing up: now you can hedge your investments. http://www.bloomberg.com/news/articles/2014-09-30/bitcoin-is-growing-up-now-you-can-hedge-your-investments