The recent announcement from CME Group’s Chicago Board of Trade in Chicago, Illinois, U.S means that soon it will become a lot easier to hedge your exposure to the world largest Cryptocurrency Bitcoin. However, to date it has been a challenge to protect yourself from the ups and downs of i.e. hedge Bitcoin. As you can see from the attached chart, Bitcoin has very little correlation with other asset classes. This means that it is not really possible to use a different asset to hedge your Bitcoin exposure.It is still a challenge to hedge very few other Tokens/Cryptocurrencies that you may hold.
Many Initial Coin Offerings ( ICO) are funded by the promotor accepting Bitcoin or Ether ie you give them Bitcoin and they give you a token in the ICO,which means that in theory one could short Bitcoin and this will give some protection to those Cryptos that still hold Bitcoin.So if Bitcoin price falls the value of your short in Bitcoin will increase to compensate you,this is soemtimes referred to effecient portfolio management or hedging your exposure.
Alternative ways to hedge a Crypto is by using CFDs or spread betting using a firm like Plus net 500. However, caution is required when using CFDs and futures as these both can allow the use of gearing which can be very dangerous especially when the underlying asset is as volatile as Cryptos are. It is also possible to use a firm like https://www.bitfinex.com or https://www.gdax.com where you are able to margin trade ie if you own one Bitcoin you can bet/increase your exposure up to 10 times your actual holding.
Improving the risk adjusted returns of your portfolio
It is interesting if you look
at the impact of having a small exposure to Bitcoin and the effect it has had on the risk adjusted returns of a portfolio. The attached chart shows how in the last three years if you had just invested 1%, but reducing the actual amount held as Bitcoin rises or buying more when the prices falls ie keeping the exposure to just 1% in Bitcoin your risk adjusted returns, as measured using a Sharpe ratio would be 30% better.But remember past performance is no guide to the future and now that Bitcoin in particluar has risen in value as you can see from the chart below.
by so much in the last year no one knows how much it will rise or fall in the next 12 months.