To decrease risk, you can simply reallocate assets to cash. If you’re seeking greater risk (and potential returns), you can reallocate assets from cash to a diversified cryptoasset portfolio. A tokenized fund that has used these strategies very successfully in light of recent market downturns is the Crypto10 Hedged fund.

Hedging refers to limiting downside risk, done by taking out an offsetting position as an “insurance policy” in the case of adverse price movements.

You’re likely unsure of where markets will go in 2020. On the one hand, we have an unfolding pandemic, an oil war, tensions with Iran, and mass unemployment.

On the other hand, traditional stock market indices like the S&P500 are rallying as of late, while during “Black Monday,” crypto didn’t escape the crash.

No one is certain how markets will move.

Some investors predict that this is a “bull trap,” before the next leg down in the markets. Two major market makers, JP Morgan, and Goldman Sachs have differing viewpoints, with the former arguing that stocks have bottomed and the latter arguing that a rebound will only occur in the second half of 2020.

What Happens When You Don’t Hedge?

Let’s take a simple example. Say that you invested in the S&P500 right at the start of 2020.

Your portfolio would be down 20% to-date, that is, if you didn’t panic sell at the first market bottom and held all the way through.

Now, let’s say you invested in Bitcoin instead, in the same date range (since January 1, 2020).

You can see that Bitcoin was wildly volatile during this time, but you’d be relatively well off, down just half a percent at the time of writing this article.

However, positions in either of these would be unwise.

By holding an index like the S&P500, your portfolio is directly correlated to global events like the COVID-19 pandemic, as the underlying assets (the 500 largest U.S. companies) suffer from the resulting destruction of consumer demand, supply chain setbacks, and more.

Holding Bitcoin is a better bet during such market downturns, as it’s very much a safe-haven compared to an asset like equity. However, you’d have no diversification at all, and would suffer from massive volatility, without even achieving positive returns in our timeframe.

A Two-Pronged Solution: Hedging and Diversification

Successful investors use strategies that offer high returns with low risk. To reduce risk, you need to diversify your portfolio and have an “insurance policy” as a hedge.

While individual alternative assets like Bitcoin may experience over 10% fluctuations in a day, by investing in many crypto assets, you can reduce volatility while increasing your exposure to the market as a whole.

However, diversification alone doesn’t put you in the clear, as most major cryptoassets track the price of Bitcoin, so you’re still in a risky position. This is where hedging comes in. The US Dollar is perhaps the strongest investment insurance you can have, as it’s remarkably stable in the short term.

Therefore, “cash hedging” is a strong way to protect your assets in the event of market downturns. To decrease risk, you can simply reallocate assets to cash. If you’re seeking greater risk (and potential returns), you can reallocate assets from cash to a diversified cryptoasset portfolio.

A tokenized fund that has used these strategies very successfully in light of recent market downturns is the Crypto10 Hedged fund.

Let’s follow-up on the examples given earlier, and say you invested in Crypto10 Hedged since January 1, 2020.

With a token price of $1.26 as of writing, you’d be up 7.7%.

In summary: S&P500 returns in our timeframe were -20%, BTC was -0.5%, and a diversified, cash-hedged crypto portfolio was up 7.7%.

Clearly, hedging works — and investors that are using it are faring far better in such an unpredictable market.

Disclaimer: The author is a consultant for Invictus Capital. His views are his own. DYOR.