How to hedge Bitcoin risk? Here’s SkyBridge Co-CIO’s take
Bitcoin‘s price, after hitting an ATH of over $58k on the charts, has been on a downtrend over the past few days, with corrections pulling BTC below $47k, at press time. Despite the scale of corrections, however, trust in the market for Bitcoin remains high, especially among institutions. Many have been using Bitcoin to diversify their portfolios and hedge against the risk in the traditional market.
The latest entrant to this list of Bitcoiners is Stone Ridge Asset Management LLC. On Thursday, the company announced its plan to make Bitcoin part of the seven strategies for the Stone Ridge Diversified Alternatives Fund. This fund will seek returns from diverse investment strategies including reinsurance, market risk transfer, Style Premium Investing, and Bitcoin, among others.
While Bitcoin may help companies diversify and hold a better position in the market, how do you hedge BTC? According to Troy Gayeski, Co-CIO of SkyBridge,
“…in this specific case of Bitcoin, we think it’s a timely trade where you want to be long. You want to be long in size that makes sense given your overall asset allocation. And for us, we’re still primarily long cash flow generative assets tied to housing or distressed corporate credit or low net exposure, long-short equity.”
The game, he said, is to size the costs, something that would help traders earn a profit if the thesis plays out. On the contrary, if it does not, the loss experienced will be tolerable.
The Skybridge exec also claimed that another way to hedge Bitcoin is to have a volatility budget in one’s portfolio depending on the volatility they can bear. He added,
” …what we’re articulating to clients is, hey, this could be a year where we’re above that target, which has been 4% to 8% We could be 10% to 12%. But if you’re going to make another 500 or 1,000 basis points from a very niche exposure that’s still in the early stages of adoption, we think that’s a great risk-reward, great trade-off.”
Apart from such hedging techniques, traders may want to consider Bitcoin’s correlation with the traditional stock market and precious metals. It has been oscillating between phases of positive correlation and negative correlation lately. In fact, just recently, it registered a weak correlation with equities and thus, can serve as a hedge against the stock market.
However, since volatility remains high in the Bitcoin market, traders may want to practice caution and move with an alternative plan to save themselves from sudden market blows.