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Time to hedge your Bitcoin portfolio?

9 Mar 2021 | 3 min read

In the past months Bitcoin has been chasing one record high after another. However in the past some of these highs have been followed by sharp price drops. Therefore, Bitcoin investors are now increasingly looking for hedging strategies against potential price setbacks. A possibility here could be Short Mini Futures. You can read more about this in the following blog article.

In the past months Bitcoin has been chasing one record high after another. However in the past some of these highs have been followed by sharp price drops. Therefore, Bitcoin investors are now increasingly looking for hedging strategies against potential price setbacks. A possibility here could be Short Mini Futures. You can read more about this in the following blog article.

Bitcoin Hype

There are few investment products that are as much in focus from the public and investors as Bitcoin is. In the recent weeks and months the prices of many cryptocurrencies have increased enormously, with the best known cryptocurrency Bitcoin leading the way in this regard. Many new record highs were reached, which at the same time meant that the interest in the digital currency also rose sharply.

Initially considered rather speculative, Bitcoin is now gaining ever more acceptance. Not only private investors, but also institutional investors such as pension funds have invested in the currency which has thus have a significant share in the price increase. Additionally, established payment providers such as PayPal accepting the crypto currency leading to it now increasingly being accepted as a means of payment. Another reason for the strong price increase was the announcement by the US electric car maker, Tesla, that it has invested in Bitcoin on a large scale. The company’s CEO, Elon Musk, announced in early February that Tesla had invested 1.5 bn USD in the cryptocurrency. Admittedly, this clear positioning of Elon Musk comes as little surprise, as the electric car pioneer has long described himself as the biggest advocate of the cryptocurrency. Given Musk’s global reach and popularity this is an opinion which has in part certainly contributed to the rise of Bitcoin. In addition, Bitcoin is seen by some investors as an inflation hedging tool – a role that was more commonly attributed to gold in the past. Now many Bitcoin investors are wondering to what extent this trend will continue or whether a slump is imminent.

Bitcoin’s volatility scares off investors

The fluctuations of the Bitcoin price, which are traditionally already at an extremely high level, increased even further at the start of the year. Within just four weeks, Bitcoin was able to record a price increase of around USD 20,000 and thus rose above the USD 57,000 mark for the first time. However, after this rapid rise, things first went in the other direction. Bitcoin fell USD 9,000 in value within a few days. Bitcoin experienced a similar situation at the end of 2017, for example, when it reached its all-time high at that time, only to plummet massively within a few weeks afterwards. Of course, such historical developments are not reliable indicators for the future, and especially with Bitcoin anything seems possible at the moment. However, the British financial market authority FCA is now explicitly warning against the latest price developments of the cryptocurrency. The high volatility in particular is not for the faint hearted and is therefore one of the main disadvantages of investing in Bitcoin.

Hedging through Short Mini Futures on the Bitcoin Future BTC1

Vontobel new Short Mini Futures could offer an opportunity to hedge against potential Bitcoin price drops. The special feature of the Mini Futures is the underlying. The underlying of the Mini Futures is not directly the price of Bitcoin, but the Bitcoin Future (BTC1), which is traded on the US Futures exchange Chicago Mercantile Exchange (CME) which is calculated and transparently published by the CME in US dollars. 

How Short Mini Futures work

Mini Futures are leveraged products that enable disproportionate (leveraged) participation in all price developments of the underlying. In the case of Short Mini Futures, this participation is inverse, i.e. contrary to the price development of the underlying, whereby it is possible to profit from a falling price of the underlying. However, if the underlying touches or exceeds a barrier at any time during the term, which is adjusted on an ongoing basis, a stop-loss event occurs. The barrier is selected in such a way that if such a barrier event occurs (touching or exceeding the stop-loss barrier), a residual value of the Mini-Future remains, on the basis of which the payout amount is calculated. However, it cannot be ruled out that, in the event of a rapid rise in the underlying price, the underlying current strike price (in the case of a short, this is above the barrier) will also be touched or exceeded, causing the Mini Future to expire worthless. In this case, there is a total loss of the capital invested.

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