You’ve no doubt heard it before, be it from Warren Buffett, CNBC, FOX, or any of the talking heads we see on finance shows on a daily basis. The cryptocurrency markets are volatile. Bitcoin has seen fluctuations over the past year taking it from over $10,000 to below $4,000 and everywhere in between. Crypto investors are, for the most part, used to the volatility of the markets. Many of them welcome the volatility in fact, but there are those who are looking for ways to limit their exposure to the volatile nature of cryptocurrency. For those wishing to go down that route, the path well traveled is your friend. Diversification is not unique to the crypto world, with many traditional finance investors hedging against volatility in this manner.
The most popular choice - Diversification
One issue for those who wish to diversify their portfolio in the crypto market is that the majority of alt coins usually follow the trends that Bitcoin set, which means that diversifying in other coins is rarely an attractive choice for investors. If you want to investigate this option, then look for the more established, less volatile coins to build the foundation of your portfolio. Bitcoin, Ethereum and Ripple are firm favorites with investors in cryptocurrency, but the key is to maintain a healthy mix of coins, so make sure to have a look around and do some research.
A high-yield savings account
When it comes to traditional fiat, most people will have heard of a high-yield savings account. Often known simply as a high-interest savings account, they usually require an initial deposit with a minimum balance which entitles you to earn a higher rate of interest than you’d get from a regular savings account. How does this apply to my crypto portfolio I hear you say? Well, while not as widespread as they are within the traditional finance world, we are seeing high-yield savings accounts appear in crypto, and they provide an excellent opportunity not only to hedge your investments but to earn interest on your funds.
One startup hitting the headlines of late is WhaleLend, which provides you with the opportunity to earn interest while your crypto funds work for you in multiple lending markets. Interest is paid on a daily basis in the same currency as your investment, and rates can fluctuate on a regular basis. The upside is that with such fluctuations comes the potential for excellent returns, with returns during 2017 on Bitfinex hitting the 15% to 20% mark for Bitcoin. Not a bad return at all. The systems used by companies such as WhaleLend are essentially margin lending for crypto, and with such mechanisms comes an element of risk. For crypto high yield savings accounts, the primary risk lies with the chosen exchange taking a hit through hacking, for example.
Using your funds in this manner isn’t risk-free, but investing, in general, carries its own risks. In the end, the risk tolerance of the individual will determine if this is the correct route to go down, or if a diversification model is more suitable. The one tremendous upside is that options for those who wish to invest in cryptocurrency are now coming to the fore. As the sector matures, we’ll hopefully see more choices for those who want to hedge their crypto investments.