Bitcoin price fell 27% in less than a week.
Abnormal Bitcoin price volatility was caused by forced liquidations of investment giants, like BlackRock and Sequoia Capital.
In periods of Bitcoin downturns or high volatility environments it’s important to use crypto insurance products.
Recent news speaks a lot about the collapse of FTX, a giant in the cryptocurrency market, which until recently was one of the TOP-3 crypto exchanges in the world and had a valuation of over $30B. After a series of negotiations with Binance the company finally filed for bankruptcy. There was no way such an event would not affect the market as a whole. As a consequence, Bitcoin fell by 27% over the past week, from $21,500 to $15,700 - the lowest mark since 2021.
Cointelegraph reports that Sam Bankman-Fried, the founder of FTX, managed his trading firm Alameda Research by using FTX clients’ assets. Moreover, Alameda Research reportedly had liabilities worth $8 billion. Since Bitcoin is used as general collateral for different cryptocurrency contracts, like DeFi contracts to FTX, it was also affected and was one of the top losers among the crypto space.
Additionally, Bitcoin volatility and price were affected by liquidity crunch and forced liquidations (as its Value at Risk was at a critical level) of investment giants, like BlackRock, SoftBank, VanEck, Sequoia Capital, or Ontario Pension Fund, all of which invested in FTX.
Crypto winter continuation
Since the beginning of 2022 Bitcoin has fallen by 67%, with every day continuously destroying people's hopes for a reversal and an early end to the crypto winter. Since last November's highs, Bitcoin fell by more than 78%. The crypto market’s total capitalisation suffered a nearly $2.2 trillion loss, and Bitcoin’s volatility surged more than 50%.
People have become worried about joining the industry and don't want to risk losing their funds, especially when considering the looming fear of a recession. But how can investors safeguard their assets?
Insuring crypto price behaviour
There are a number of tools and strategies that an investor can make use of to hedge risks and protect themselves from loss. Futures, swaps, or options are commonly considered good instruments to turn to. But in this article I would like to highlight another arguably simpler instrument - crypto price insurance.
This kind of insurance provides the possibility of protecting user’s digital assets against unfavourable price movements and surges in market volatility. Generally, It works as follows: after purchasing some cryptocurrency (Bitcoin, Ethereum, Ripple, Solana, etc.), the investor can set up an insurance contract for a suitable period of time, a desired amount of digital assets to insure, and a set price at which the assets will be insured.
When the insurance contract expires, the service provider will assess the value of the investor’s digital assets according to the ongoing market rate. If the rate proves to be lower than the price at which the investor originally bought and insured his crypto, the provider will compensate for the difference.
To summarise, crypto price insurance is a tool quite similar to traditional options, only with some kinks ironed out. As the provider company handles the heavy lifting, users don’t need to hedge their risks personally, making the whole process a lot simpler and smoother.
In addition, companies can provide insurance coverage via different assets: cryptocurrencies, tokens, USDT stablecoin, or even fiat currencies, like USD or EUR. This kind of versatility offers a great advantage, as users can choose a preferable method of compensation for themselves.
So, with such insurance in place investors could survive the latest Bitcoin drop without losing a penny.
Crypto insurance as one of the ways to beat the market
One of the most important aspects in portfolio management is to combine assets which allow you to earn the biggest returns with minimal risks. It is important to secure your portfolio during downturns or high volatility periods, using various financial instruments.
Insurance services like we’ve covered above can be an effective means of attracting more retail and institutional investors, as they provide the safeguards for people to feel more secure in a risky environment. If price insurance becomes a staple service offered by any crypto platform in addition to other products, it will be taken as a sign of a maturing digital asset ecosystem.
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