Blood. Everywhere. The combined market cap of
cryptocurrencies has declined from a staggering $3 trillion in November 2021 to
$1.2 trillion as of this writing. From an all-time high of $69,000 on Nov.10,
Bitcoin has tumbled to $28,000. In fact, the OG crypto has traded lower for
eight consecutive weeks, the longest continuous string of red weekly candles in
history.
Ether, the leader of the altcoin pack, has lost
65% of its value since the November 2021 high. Many other coins like Solana and
Chainlink are down approximately 80% from their respective peaks. That’s what a
bear market looks like in the wild world of crypto. The stock markets enter
bear territory when they fall 20%, but a 20% decline is just a regular Thursday
for crypto.
Capital.com’s Pulse Q1
2022 report reveals that cryptocurrencies
witnessed a steady decline in investor participation throughout the first
quarter after starting the year on a high in January. Traders of digital assets
on Capital.com dropped 16% in February and a further 10% in March.
The continued slide of cryptocurrencies since
November 2021 explains the growing disinterest in crypto assets among retail
traders. What’s surprising is that commodities overtook cryptocurrencies in
terms of trader participation during Q1 2022, according to the Capital.com
report. The recent buoyancy in raw-material prices drew traders away from the
volatility in equities and cryptocurrencies towards commodities.
In such a brutal market, many traders and
investors are left wondering what moves they should make to mitigate the
downside risk and, hopefully, recoup the losses.
Passive
income strategies?
Veteran investors don’t merely HODL and see
their wealth erode in a bear market. They set themselves apart from the less
fortunate ones by focusing on ways to reduce risk while setting their
portfolios up for massive future gains. Passive income strategies like staking, liquidity mining, and lending help them earn predictable
rewards.
For instance, Cake DeFi offers users liquidity
mining rewards of up to 45% on popular currency pairs such as BTC-DFI and
ETH-DFI. It also lets you lend your cryptocurrencies like Bitcoin, Ethereum,
USDT, USDC and others at up to 6.5% APY.
Those interested in staking can join fully
transparent masternode pools on Cake DeFi to earn staking yields of up to 30%
in real-time, without the complexity of running nodes. During the first quarter
of 2022, Cake DeFi paid
out $73 million in rewards to its users
despite the falling crypto prices.
For the uninitiated, staking is when you put
your Proof of Stake (PoS) coins towards transaction validation on the
blockchain network. Liquidity mining aka yield farming is a DeFi mechanism
where you deposit your crypto assets into various liquidity pools to earn
rewards in the form of tokens and fees.
These strategies allow investors to make decent
gains during good times, and reduce the losses when times are tough.
Derivatives:
A useful tool in bear markets
Crypto derivatives have witnessed explosive
growth over the last few years. They are an integral part of any financial
system, and crypto is no exception. Derivatives are contracts that get their
value from an underlying asset or index such as stocks, cryptocurrencies,
stablecoins, and more.
Since the value of derivatives comes from the
underlying asset, you can enter into a derivatives contract to speculate on the
price, use leverage, or hedge your risk exposure. Hedging is a far better
option than waiting for the price to recover or liquidate holdings at an
unfavorable price.
Beginner investors often stay away from
derivatives because these instruments are relatively risky, especially in
leveraged contracts. But innovative platforms like HyperDex are making it
easier for beginners to protect their portfolios in bear markets. HyperDex is a
DeFi asset management platform that overcomes the many barriers to effective,
efficient finance.
HyperDex’s Race Trading Cube enables users to
speculate on the outcomes of future prices of selected crypto assets. Users
make a prediction on the future price, then HyperDex Race Cube automatically
calculates the necessary information for the user’s stops, position in the market
(long / short) along with proper leverage according to the user’s risk profile.
The main advantage here is tailored for inexperienced traders, who will benefit
from a structure that is easy to understand.
Two of the most popular derivatives are the futures
and options. Futures are contracts for the purchase and delivery of an asset at
a predetermined price on a future date. Both parties have an obligation to
carry out the contract as agreed.
Options are different in that they give buyers
the “right” but not the “obligation” to buy the asset. You have to pay a
premium to avail the right, and when the time comes, you have the freedom to
choose whether to exercise the right or let the contract expire.
A “call” option is the right to buy the
underlying asset. The right to sell is a “put” option. Traders can use call and
put options to reduce the risk at a reasonably low cost. Depending on where you
expect the prices of your favorite cryptocurrencies to be in the future, you
can use options to hedge your portfolio or benefit from the upside.
However, if you are sure about the direction but
not about the time-frame, you could use perpetual futures to play it safe.
Perps, as they are often called, don’t have an expiry date. You can keep your
contracts as long as you want, though you have to pay a small fee called the
funding rate.
AAX, one of the world’s leading derivatives
exchanges, offers a wide variety of perpetual futures contracts backed by BTC,
ETH, DOT, and other cryptocurrencies. It allows you leverage of up to 100x.
Unless you’re forced to liquidate upon hitting the point of maximum loss,
you’re in full control when you want to exit the market.
AAX uses cutting-edge technology
to position itself for growth in 2022 and beyond. In fact, it is the first-ever
digital asset exchange to run on LSEG Technology’s Millennium Exchange, the
same matching engine driving tier-one capital markets.
What
are the derivatives markets telling you?
According to the blockchain analytics firm Glassnode, perpetual
futures have become insanely popular. As of May 23rd, open interest in the
futures market hovered around $15 billion, with perpetual futures accounting
for 67% of the total.
The derivatives market also gives you
indications of what crypto traders are expecting and betting on. They are
largely expecting another
major downward move in Bitcoin prices. Glassnode said in
its latest report that the derivatives market is signaling fear of further
downside, at least for the next 3-6 months. Uncertainty and downside risk looms
large in the short-term.
In such a painful market, no wonder investors
are more inclined towards put options. The put/call ratio for open interest has
jumped from 50% to 70% in the last couple of weeks as investors hedge their
positions against further downside.
For the remainder of Q2, there’s a clear
preference for put options with strike prices of $25K, $20K, and $15K. The pool
of open call options is much smaller, and the investor interest is concentrated
around the $40k strike price.
In the longer-term, options open interest at the
end of 2022 reflect optimism. There is a clear preference for call options,
with concentration around strike prices of $70k to $100k. It indicates that the
markets are uncertain about the short-term but have a more constructive view
out to the year’s end.
Closing
thoughts
We don’t know when the bear market will end, but
we do know that the bearish sentiments tend to get a lot worse before optimism
starts kicking in. Passive income strategies and, more importantly, derivatives
are the most useful tools at the disposal of crypto investors. Crypto
derivatives trading is a great option for both beginner investors and seasoned
ones alike. Depending on how much risk you’re willing to take, you can go with
various derivatives products to not only protect your portfolio but also set it
for massive gains.