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Hedging strategies for a crypto bear market

Finding effective ways to protect a crypto portfolio during a bear market is key to long-term investing success.

The central theses

  • There are several ways to protect a portfolio during a bear market. The aim is to limit losses and volatility.
  • The crypto market has been in a downtrend since mid-November 2021.
  • Phemex has many resources to help investors learn about defensive strategies.

Bear markets are an inevitable part of investing. With crypto, they are usually more intense due to the volatility of the industry. In response, many investors are selling at a loss or impulsively buying into the next hot token in hopes of a quick recovery.

Instead, they should hedge, that is, make additional investments that limit losses from their existing investments. For example, if you hold and the price falls, hedging can reduce your overall loss.

Are we in a bear market?

Since its peak in mid-November 2021, the total cryptocurrency market cap has declined significantly.

Take Bitcoin. Once viewed as a hedge against inflation and regularly compared to , its recent price action has shifted to closely correlate with .

What does that mean? Bitcoin is a “risky” asset. As a result, it is sensitive to interest rate movements, both up and down.

In general, the Fed is struggling. Consumers tend to borrow less and limit spending, which in turn causes the prices of financial assets like cryptocurrencies to fall.

In times of rising interest rates, investors tend to park their wealth in high-yield instruments such as bonds. The opposite occurs when interest rates fall, which generally rewards investors who put money into riskier assets.

With the Fed’s recent announcement of a 75 basis point hike in the federal funds rate (the largest one-month hike in 28 years), many crypto investors’ portfolios have taken a hit.

YTD Change in Dollar Price of Gold & Bitcoin and NASDAQ Comp
Source NOW

But it’s not all doom and gloom. There are ways to make it through the next bull market alive. The following section outlines a number of hedging strategies designed to help crypto investors protect their portfolios: short selling, increasing stablecoin exposure, options, yield farming, and dollar cost averaging.

short sale

Short selling allows investors to benefit when crypto prices fall in value. The goal is to return a previously borrowed asset (in this case, cryptocurrency) to a lender and collect the difference. Unlike a long position, where upside potential is unlimited, gains are capped at the asset’s floor price.

Increasing stablecoin exposure

While not entirely risk-free, stablecoins allow investors to escape volatility by generally pegging their value to fiat currencies. While holding positions in stablecoins, investors can even earn passive income by staking their coins with DeFi applications or depositing their tokens on centralized platforms or exchanges.

However, be careful as “extreme market conditions” can lead to platforms blocking fund withdrawals.

crypto options

Options contracts come in two varieties, calls and puts. Traders can protect long positions by buying put options. A put is a type of contract that allows the buyer of the agreement to sell a specific asset at a future date for today’s price.

In other words, buying a put contract is like buying portfolio insurance. It provides an opportunity to sell a falling token at a predetermined strike price.

Another option is to sell call options. Here, the seller receives a premium for agreeing to deliver the underlying asset at a specified price before a specified date if the buyer requests it.

yield farming

Yield farming is a process that allows users to earn rewards by pooling their crypto assets. Other users can use the cryptocurrencies added to these pools, controlled by software (known as smart contracts), for lending, borrowing and staking.

Applications like or Balancer can offer APYs between 5% and 11% and reward users who deposit their BTC, , and stablecoins.

Dollar Cost Averaging

Averaging dollar costs can reduce the impact of volatility by spreading the purchase of an asset over time. The benefit of regularly buying during market downtrends is that it secures higher returns by holding assets into a bull market.


Although the crypto market is in panic mode, there are simple effective strategies to protect and even grow your crypto stack. Visit Phemex Academy to learn more.

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