We’ve become so accustomed to the incredible gains, as a result of rising crypto prices, our greed takes over and we stop thinking about taking profits. A lot of people erroneously believe they’ve become great traders because up till now they were making a profit.
It doesn’t take a genius to make money during an uptrend.
All you had to do was run some trading bots, follow some signals or leads and you would have doubled, tripled, or quadrupled your money over the course of a few months. We’ve seen this before in 2017 and it’s not any different now. But what sets great traders or investors apart from the rest is how well they manage their positions during a downtrend or a flash crash.
I’ve written an article about this before, but essentially what you need to understand is the amount you lose is crucial for the recovery of your loss.
If you lose, say 50% it means you need to gain 100% to recover the loss. Simply put, if you have $1000 worth of bitcoin and it drops by 50% you end up with $500 and to get back to $1000 you need to double (or 100%) your money.
As you can see the limit is at about 10% once you lose more than that it becomes harder and harder to recover your positions.
4 ways to minimize your losses
1. Market neutral investments
Invest in market neutral solutions, my previous article discussed such a method. Unfortunately, people dismiss it often because they can get higher gains during an uptrend from trading or just hodling but then lose all their gains overnight when the market drops. A Spot/Futures Arbitrage Bot might offer a solution as it’s market neutral.
Note: during a downturn the funding rate will be lower and can even turn negative, but you can stop, cash out your profits and restart once the funding rate is up again should you want to. More often than not the funding rate is positive for the short positions.
2. Short the market
Another way to earn from a bearish trend is to not fight the trend but go along with it.
- Trading Futures offers you a great way to gain from a negative trend. You can read up on it in another article I wrote on trading perpetual futures, it’s aimed at Binance users, but the logic applies to any exchange that offers perpetual futures such as Bybit, Kucoin or others.
- Another way to short crypto would be through margin trading, essentially borrowing crypto to sell it and buy it back cheaper, netting the difference as profit.
- Some exchanges also offer option trading, Binance offers a simplified version that can be used to make profits by predicting a price drop.
- Price prediction (called battle on Binance) where you battle against another “player” based on price prediction.
- Using an inverse ETF (exchange traded fund). On Binance there’s BTCDOWN/USDT, it tracks the inverse of BTC. On Pionex you’ll find BTCS/USDT and BTC3S/USDT, where the first one tracks the inverse of BTC while the latter tracks it with 3x the leverage. An advantage of using an inverse ETF over some of the other methods is that can be traded without having to worry about the complexity of using margin or futures. However keep in mind it is not wise to stay long in leveraged ETFs.
For example, if the BTC goes down by 5%, a 2x leveraged BTC2L/USDT should move down 10%. Assume for simplicity's sake price of the BTC price is $10K, BTC2L/USDT should be down to $9K after the first day. On the second day, BTC moves up 5%.BTC
---
$10K - $0.5K (-5%) = $9.5K (day 1)
$9.5K + $0.475K (+5%) = $9.975K (day 2)Net loss: $9.975K-$10K = -$0.025K or -0.25% after 2 daysBTC2L/USDT
----------$10K - $1K (-10%) = $9K (day 1)
$9K + $0.9K (+10%) = $9.9K (day 2)Net loss: $9.9K-$10K = -$0.1K or -1% after 2 days
As you can see a leveraged ETF isn’t good for long-term holding especially with high volatility.
3. Become a liquidity provider for stable coins
Another way would be to stay in stable coins and become a liquidity provider. Liquid Swap (Binance) is not without risks and can even be a net negative but for stable coins the risks are fairly low because both stable coins are pegged to the dollar. On top of the yield, you get a BNB bonus (Binance) for providing liquidity.
4. Use a STOP-LOSS!
I can’t stress this enough, but set a stop-loss! If the market tanks it’ll take you out of a trade before any serious damage happens. However, when you’re not trading in stable coin pairs that might not do much. Therefore, you need to have an automated system that converts your crypto to a stable coin during a sudden crash.
Some trading bots, such as Cryptohopper have a mechanism for this. With Cryptohopper you can set up triggers that execute when certain technical indicators get “triggered” one of those triggers is the percentage change during a certain time frame.
More info here:
Tip: When choosing a trading bot make sure there is an automated way to convert to stable coins in case of sudden market movements.
If you’re not into bot trading or you want such a feature on your long-term HODL portfolio a portfolio rebalancer with support for it might be a better choice. A good portfolio rebalancer that’s been around for a few years is Shrimpy. It offers rebalancing (If you wonder what this is check out the article below).
Shrimpy not only rebalances your portfolio but you can also use it to follow others that are more successful at rebalancing their portfolios, your portfolio will just copy their positions. Or you could just create an index of a number of coins on the basis of their market cap or weighted market cap.
But the main feature we’re interested in for the purpose of this article is its stop-loss feature. This stop-loss feature tracks the percentage loss of your entire portfolio within a specific time period.
You can also set a positive threshold to catch profits (both not both at the same time unfortunately)
More info here:
The above references an opinion and is for information purposes only. It is not intended to be investment advice and may contain affiliate links. Seek a duly licensed professional for investment advice.
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