Shaurya Malwa · 10 hours ago · 2 min read
Guest Post › Bitcoin › Analysis
Bitcoin volatility is back: Trading tools can protect both traders and the stability of the industry
After months of bitcoin experiencing surprising stability, its volatility is back. Faith in its equilibrium was lost as its value dropped and gained more than $1,000 in minutes at the beginning of the month of August.
Bitcoin has had a rocky history – it reached nearly $20,000 in 2017 making a +1,318% rate of return in just twelve months, before experiencing an enormous collapse in 2018. This year, it had a more positive story of stability – but its value plunged by half within hours during the Black Thursday stock market crash in March as its volatility hit a 6-year high.
It reached new highs for the year in the last few weeks, surpassing $12,000 at the beginning of August, before dropping again by nearly $1,500 in ten minutes immediately after. Traders are often nervously waiting on the edge of their seat – analysing the intricate details of daily, hourly and by-the-minute price changes in the hopes of placing a bet that will pay off.
Bitcoin’s price is influenced by varying factors. External forces as wide-ranging as crashing oil prices to Trump ordering unemployment checks are blamed. Whales moving thousands of bitcoin without warning also impact its price.
But traders have a wide range of tools at their disposal to use to get ahead and protect themselves against bitcoin volatility. Depending on the trade, these tools can save traders up to millions of dollars – you just need to know how to use them to your advantage.
Trading tools can protect your crypto from market volatility
There is ample opportunity in investing in cryptocurrencies, but you don’t need to sell off your investments to protect yourself from these unexpected price changes. Volatility is not necessarily a bad thing – it can be used to a traders’ advantage.
For risk-takers, investors can use volatility to turn quick profits. But for those who are risk-averse, trading cryptocurrencies is often used to protect from inflation and seek more valuable stable investments.
Traders find profits by following the market direction. If they make an accurate prediction, they make a profit. But if they predict incorrectly, they can cut big losses. When a direction changes, gains can disappear quickly in the form of liquidations, especially in the crypto derivatives market where leverage can be over 100x.
This is why traders use tools like futures contracts and indices. You can position yourself for directional risks or bet on market volatility, meaning you can be protected without directional exposure.
Removing settlement risks and slippage with multi-currency order books
Price slippage is usually inevitable for most traders whether they trade on stocks, forex or future contracts. This happens when an order is made but the price on exit is different – even a fraction of a second between making and settling an order can be a big difference.
But this doesn’t have to be the case, and this is where multi-currency order books can help. This is the first of its kind and offers an order book fully inclusive of crypto assets, fiat currencies and stablecoins.
They’re liquidity havens for traders because you can save fees on side-stepping transactions and converting into preferred currencies. If you want to trade LTC with ETH you can do it in one transaction instead of paying double to sell ETH for USD, then buy LTC on a separate order book.
This means regardless of the popularity of the trading pair, every trader can see the same liquidity and experience fairer pricing. You can also choose to access a native multi-currency order book where your order is matched in your native currency first, allowing you to get better price efficiencies, tighter spreads and savings on conversion fees.
These tools have seen a dramatic increase in interest as large institutional investors begin to recognise the value of investing in bitcoin and saving millions of dollars each year in transaction costs and slippage.
Taking hedge bets against whether gold or bitcoin is a better store of value
To protect further from volatility, traders often seek to access lower-risk assets like gold. Futures contracts on gold is a popular way to access a hedge against inflation during intense market volatility. Gold has shown great interest this year, with Bloomberg’s 2020 Commodity Outlook claiming both gold and bitcoin are the top candidates of trade this year.
This has left many investors to ask whether gold or bitcoin is a better store of value to hedge against inflation. In response to this increasingly asked question, we developed a tool enabling traders to directly compare the performance of bitcoin versus gold to predict the future development of both in-demand assets.
This tool is the first of its kind and allows traders to see and predict the price per troy ounce of London fine gold with an index price derived from Tether Gold (XAUt) and the price visible in bitcoin. This new tool allows risk-averse traders to speculate on whether bitcoin or gold will turn out to have the most demand and outperform the other new stores of value, and bet accordingly with less risk.
Betting against dominance instead of direction can protect traders
Another great way of protecting assets against market volatility is by betting on overall dominance instead of asset increase or decrease. You can do this through a new derivative tool called Bitcoin Dominance Futures, where you can choose to take a position on bitcoin’s overall share of the market and settle in a variety of currencies.
This is an increasingly popular new trading game for bitcoin traders who prefer to bet on bitcoin’s overall market cap dominance compared to other coins on the market. Add that with a multi-currency order book and you can access the highest liquidity for this tool on the market, as well as greater flexibility to decide which margin you’d like to trade and settle in.
You can dramatically avoid price slippage if bitcoin is in decline and you don’t need to convert assets and pay unnecessary transaction and conversion fees at the end of the trade. It offers less volatile exposure because bitcoin is referenced to a broader basket of digital assets.
We’ve already seen a huge uptick in institutions using these tools in correlation with an increase in BTC and ETH value. Half of our institutional accounts have already taken part in these services, with many saying the tools have improved their return on assets by over 40%. We’ve also seen a 10% growth month-by-month of AUM’s taking advantage of the multi-asset collateral system.
Trading basket index futures can improve diversification and lower volatility exposure
Trading indices allow you to make a trade on a movement of a range of currencies as a whole and protect you from the risks facing a specific cryptocurrency. Trading in a basket indices means you are automatically diversifying your portfolio as your investment represents a range of currencies rather than one.
These are great tools for traders to hedge their portfolio and achieve lower volatility, less exposure and a diversification effect. Our main coin index (BBCX) or altcoin index future (BBAX) for example, tracks the real-time market performance of a basket of large cap cryptocurrencies by free-float market capitalization.
This is a great advantage for our institutional clients looking to track multiple crypto assets across multiple pricing sources at sub-second frequency. In the near future, we will be adding DeFi index futures to our baskets.
Trading tools are an essential part of protecting the industry
Tools to protect against volatility are not only keys for making better traders – they also play an important role in ensuring the long-term stability and growth of the cryptocurrency ecosystem. Cryptocurrencies are fast maturing, and we are seeing more governments, banks and traditional institutional investors getting on board.
The market volatility of the industry is holding it back, and utilizing volatility protection tools like these can not only help investors save thousands, if not millions of dollars, but it can help more traders understand how to predict and react to a valuable and booming market.
With greater awareness of these tools, we are facilitating a roadmap that will bring more traditional players to the industry who will feel safer knowing they have greater control of their finances and their ability to not fall victim to the volatility of the industry. They just need the tools to know-how.