{"id":30805,"date":"2024-03-13T00:49:16","date_gmt":"2024-03-12T23:49:16","guid":{"rendered":"https:\/\/quantpedia.com\/?p=30805"},"modified":"2025-06-04T13:57:11","modified_gmt":"2025-06-04T11:57:11","slug":"systematic-hedging-of-the-cryptocurrency-portfolio","status":"publish","type":"post","link":"https:\/\/vvv.quantpedia.com\/es\/systematic-hedging-of-the-cryptocurrency-portfolio\/","title":{"rendered":"Systematic Hedging of the Cryptocurrency Portfolio"},"content":{"rendered":"\n<h1 class=\"wp-block-heading\">Introduction<\/h1>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Cryptocurrencies are already one of the major asset classes. They fill the top pages of magazines and are a topic of a day to day conversation. There are a lot of ways to buy them through a lot of different channels. But some of the hardcore HODLers like to keep their coin portfolio safe &#8211; they buy a portfolio of cryptocurrencies and hold them in cold storage. It has a lot of advantages (you will probably not become a victim of hacking if your crypto coins are in cold storage in your wall safe) but also some disadvantages (your cold storage device can become unreadable or destroyed). One of the disadvantages of cold storage is that while you hold the cryptocurrencies in your cold storage, you are exposed to the price swings of the cryptocurrency market (which can be tremendous). <strong>But do you need to have this risk, especially when the market is at an all-time high?<\/strong> What if you smartly hedged a portion of your portfolio? The goal of this article is to serve as an inspiration for a hedging strategy for your cold storage cryptocurrency portfolio. We do not say this is the only way to run a hedging strategy, but we would like to inspire you to start thinking about this possibility even when you have not considered it yet. Are you ready? Then let&#8217;s go \ud83d\ude42<\/strong><\/p>\n\n\n\n<center>Video summary:<\/center>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-embed-youtube wp-block-embed is-type-video is-provider-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio responsive-video wp-embed-aspect-4-3\"><div class=\"wp-block-embed__wrapper\">\n<iframe title=\"Systematic Hedging of the Cryptocurrency Portfolio - Quantpedia Explains (Trading Strategies)\" width=\"800\" height=\"450\" src=\"https:\/\/www.youtube.com\/embed\/i6RBt11IXFA?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Setup<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Imagine you want to permanently store the top 5 alts (altcoins) in a soft\/hardware wallet and find an optimal hedging strategy through BTC derivatives to minimize crypto market beta exposure risk. How do we best approach that?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We have created a hypothetical market capitalization-weighted Top 5 cryptocurrency index portfolio (T5) as a proxy for a portfolio; hard-core HODLers may hold that. We now do not deal with the task of picking individual coins into your portfolio. That&#8217;s the topic that is covered in entirely different articles (see, for example, our&nbsp;<a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/cryptocurrency-trading-research\/\" target=\"_blank\" rel=\"noreferrer noopener\">list of research articles related to cryptocurrency trading<\/a>&nbsp;or our database entries with&nbsp;<a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/screener\/?screener_tab=screener-classic&amp;FilterKeywords=cryptocurrencies\" target=\"_blank\" rel=\"noreferrer noopener\">cryptocurrency trading strategies<\/a>).&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The rule for inclusion in the index is simple. Each year, on the first day of the year, select 5 top coins ranked by market cap for a yearly holding period. Include them in the index based on market cap weight (thus proportionally). We exclude the stablecoins from the index as the goal of the cold wallet is to hold the true cryptocurrency coins. So, the following coins can&#8217;t be part of the portfolio:<\/p>\n\n\n\n<figure class=\"wp-block-table aligncenter is-style-regular\"><table><tbody><tr><td class=\"has-text-align-center\" data-align=\"center\"><a href=\"https:\/\/coinmarketcap.com\/currencies\/tether\/\" target=\"_blank\" rel=\"noopener\">Tether<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">USDT<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a href=\"https:\/\/coinmarketcap.com\/currencies\/usd-coin\/\" target=\"_blank\" rel=\"noopener\">USD Coin<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">USDC<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a href=\"https:\/\/coinmarketcap.com\/currencies\/binance-usd\/\" target=\"_blank\" rel=\"noopener\">Binance USD<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">BUSD<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Data<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;from 2015, daily CoinMarketCap <https:\/\/coinmarketcap.com\/currencies\/bitcoin\/historical-data\/>, top 3 months&quot;}&#8221; data-sheets-userformat=&#8221;{&quot;2&quot;:963,&quot;3&quot;:{&quot;1&quot;:0},&quot;4&quot;:{&quot;1&quot;:2,&quot;2&quot;:16776960},&quot;9&quot;:1,&quot;10&quot;:1,&quot;11&quot;:4,&quot;12&quot;:0}&#8221;>Data are collected from&nbsp;<a href=\"https:\/\/coinmarketcap.com\/\" target=\"_blank\" rel=\"noopener\">CoinMarketCap<\/a>. In daily granularity, we select a span from 2015 to have enough data for further investigation.<\/span> Here, we list coin ranks at the corresponding year start:<\/p>\n\n\n\n<figure class=\"wp-block-table aligncenter is-style-regular\"><table><tbody><tr><td class=\"has-text-align-center\" data-align=\"center\"><a href=\"https:\/\/coinmarketcap.com\/historical\/20150101\/\" target=\"_blank\" rel=\"noreferrer noopener\"><em>rank \/ year<\/em><\/a><\/td><td><em>2015<\/em><\/td><td><em>2016<\/em><\/td><td><em>2017<\/em><\/td><td><em>2018<\/em><\/td><td><em>2019<\/em><\/td><td><em>2020<\/em><\/td><td><em>2021<\/em><\/td><td><em>2022<\/em><\/td><td><em>2023<\/em><\/td><td><em>2024<\/em><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><em>1<\/em><\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>BTC<\/td><td>&#8211;<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><em>2<\/em><\/td><td>XRP<\/td><td>XRP<\/td><td>ETH<\/td><td>XRP<\/td><td>XRP<\/td><td>ETH<\/td><td>ETH<\/td><td>ETH<\/td><td>ETH<\/td><td>&#8211;<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><em>3<\/em><\/td><td>XPY<\/td><td>LTC<\/td><td>XRP<\/td><td>ETH<\/td><td>ETH<\/td><td>XRP<\/td><td>XRP<\/td><td>BNB<\/td><td>BNB<\/td><td>&#8211;<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><em>4<\/em><\/td><td>LTC<\/td><td>ETH<\/td><td>LTC<\/td><td>BCH<\/td><td>BCH<\/td><td>BCH<\/td><td>LTC<\/td><td>SOL<\/td><td>XRP<\/td><td>&#8211;<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><em>5<\/em><\/td><td>BTS<\/td><td>DASH<\/td><td>XMR<\/td><td>ADA<\/td><td>EOS<\/td><td>LTC<\/td><td>DOT<\/td><td>ADA<\/td><td>DOGE<\/td><td>&#8211;<\/td><\/tr><\/tbody><\/table><figcaption class=\"wp-element-caption\">Crypto coins that would form part of the portfolio during each year<\/figcaption><\/figure>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/bitcoin\/\" target=\"_blank\" rel=\"noopener\">Bitcoin<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">BTC<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/xrp\/\" target=\"_blank\" rel=\"noopener\">XRP<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">XRP<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/paycoin2\/\" target=\"_blank\" rel=\"noopener\">PayCoin<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">XPY<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/litecoin\/\" target=\"_blank\" rel=\"noopener\">Litecoin<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">LTC<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/bitshares\/\" target=\"_blank\" rel=\"noopener\">BitShares<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">BTS<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/ethereum\/\" target=\"_blank\" rel=\"noopener\">Ethereum<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">ETH<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/dash\/\" target=\"_blank\" rel=\"noopener\">Dash<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\"><div bis_skin_checked=\"1\">DASH<\/div><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/monero\/\" target=\"_blank\" rel=\"noopener\">Monero<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">XMR<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/bitcoin-cash\/\" target=\"_blank\" rel=\"noopener\">Bitcoin Cash<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">BCH<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/cardano\/\" target=\"_blank\" rel=\"noopener\">Cardano<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">ADA<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/eos\/\" target=\"_blank\" rel=\"noopener\">EOS<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">EOS<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/polkadot-new\/\" target=\"_blank\" rel=\"noopener\">Polkadot<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">DOT<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/bnb\/\" target=\"_blank\" rel=\"noopener\">BNB<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">BNB<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/solana\/\" target=\"_blank\" rel=\"noopener\">Solana<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\">SOL<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><a class=\"in-cell-link\" href=\"https:\/\/coinmarketcap.com\/currencies\/dogecoin\/\" target=\"_blank\" rel=\"noopener\">Dogecoin<\/a><\/td><td class=\"has-text-align-center\" data-align=\"center\"><div bis_skin_checked=\"1\">DOGE<div bis_skin_checked=\"1\"><\/div><\/div><\/td><\/tr><\/tbody><\/table><figcaption class=\"wp-element-caption\">Legend (name of cryptocurrency + generally accepted ticker, in descending manner of inclusion from first appearance)<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Methodology<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The top 5 index is constructed in such a way as to mimic the B&amp;H (buy &amp; hold) approach, often favored by both individual and institutional investors (but maybe in different asset classes of choice). This is similar to the construction of market cap-weighted equity indexes such as the Dow Jones Industrial Average (Dow 30, as seen on CNBC, the <a href=\"https:\/\/en.wikipedia.org\/wiki\/Dow_Jones_Industrial_Average\" target=\"_blank\" rel=\"noopener\">stock market index of 30 prominent companies listed on stock exchanges in the United States<\/a>, but our index is even more concentrated).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Research Purpose<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Investors in cryptocurrencies can experience crazy bubble rallies of altcoins, but brutal drawdowns (some even over -80 %) may be associated with them. This is the disadvantage of B&amp;H portfolios in most asset classes, but cryptos are by far the most risky. Everybody wants to mitigate that B&amp;H risk somehow; nobody likes to see their portfolio value disappear exceptionally fast, as in crypto busts. And that is where&nbsp;<a href=\"https:\/\/www.investopedia.com\/trading\/hedging-beginners-guide\/\" target=\"_blank\" rel=\"noreferrer noopener\">hedging<\/a>&nbsp;arrives to (at least) a particular rescue.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">There are many aspects of how something can be hedged; for our purposes, we selected a selective sequential one: We would hedge parts of the portfolio some days. The question is: how big should the hedge be, and when should it be commenced? Plus, what should be the hedge? Suspecting that there is left Bitcoin beta residual associated with other cryptocurrencies (as Bitcoin is the largest and the oldest cryptocurrency), we suppose that beta can be efficiently hedged out by Bitcoin derivatives, which may offer an antidote to drawdowns.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Results and Solution<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">First, we would present three naive hedging solutions, review them, check the residual spread performance, and compare advantages and disadvantages. Then, we would move to the active hedging strategy. However, let&#8217;s at least show the performances of&nbsp;<em>Bitcoin<\/em>&nbsp;and our considered and constructed&nbsp;<em>T5 Index<\/em>&nbsp;for a start:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img fetchpriority=\"high\" decoding=\"async\" width=\"1024\" height=\"633\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/01\/image-4-1024x633.png\" alt=\"\" class=\"wp-image-31966\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-4-1024x633.png 1024w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-4-300x186.png 300w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-4.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Now, onto the first one (proposed solution):<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;- `1. 1:1 hedge - long portfolio, short tie BTC - ukazat grafy - velka volatilita, hlavne 2015, 2017, 2018&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12801,&quot;3&quot;:{&quot;1&quot;:0},&quot;12&quot;:0,&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:12}\">1. 1:1 (Proportional) Hedge<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;- `1. 1:1 hedge - long portfolio, short tie BTC - ukazat grafy - velka volatilita, hlavne 2015, 2017, 2018&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12801,&quot;3&quot;:{&quot;1&quot;:0},&quot;12&quot;:0,&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:12}\">As introduced earlier, we are long the Top 5 Index portfolio and short the exact amount of <\/span>$ value<span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;- `1. 1:1 hedge - long portfolio, short tie BTC - ukazat grafy - velka volatilita, hlavne 2015, 2017, 2018&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12801,&quot;3&quot;:{&quot;1&quot;:0},&quot;12&quot;:0,&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:12}\"> corresponding to Bitcoin (BTC).<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large\"><img decoding=\"async\" width=\"1024\" height=\"633\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/01\/image-5-1024x633.png\" alt=\"\" class=\"wp-image-31971\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-5-1024x633.png 1024w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-5-300x186.png 300w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-5.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><figcaption class=\"wp-element-caption\">Spread T5 &#8211; BTC over time<\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">The graph showing the performances of the spread T5 &#8211; BTC shows high volatility, especially in the years 2015, 2017, and 2018. The volatility of the spread portfolio after we naively remove the beta starts to decrease only after the year 2018.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">After noticing the difference in the spread&#8217;s volatility after the year 2018, we decided to split the sample to two parts &#8211; 2015-2018 (included) and 2019-2023.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"633\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/image-2-1024x633.png\" alt=\"\" class=\"wp-image-32736\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/image-2-1024x633.png 1024w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/image-2-300x186.png 300w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/image-2.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">This is the comparison of the behavior of the na\u00efvely leveraged spread over time from the start of 2015 and 2019, respectively, where&nbsp;<em>x<\/em>-axe depicts&nbsp;<em>t<\/em>&nbsp;days from the start of those years. After the orange line ends, it is the last day of 2018, and the blue line continues that same spread from the first day of 2019. Once again, the volatility of the spread has been considerably dampened since 2018. In the 2015-2018 window, the average yearly spread volatility was 3.94%, whereas in the later period, it was 2.48%.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Why is it so? Once again, we suspect the introduction of Bitcoin futures is the cause (as we discussed in our&nbsp;<a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/how-much-bitcoin-should-we-allocate-to-the-portfolio\/\" target=\"_blank\" rel=\"noreferrer noopener\">previous article about the optimal portion of the usual investment portfolio allocated to Bitcoin<\/a>).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;- 3. regression za cele obdobie - a tam nam vysla optimalna beta cca 0.96 (to nam ukazuje, ze ten naive long 100% v cold storage a short 100% BTC je celkom v pohode)&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12801,&quot;3&quot;:{&quot;1&quot;:0},&quot;12&quot;:0,&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:12}\">2. Regression for the Whole Period<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">In our 2nd attempt, we tried to run a simple OLS regression over the whole period and find out the beta coefficient. In this na\u00efve &#8220;back-test&#8221;; the optimal beta was found to be ~ 0.97. Of course, we can&#8217;t use it in reality as in the first years, we would not know the data from the future. But still, this serves useful as a mental exercise. <\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"633\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/01\/image-6-1024x633.png\" alt=\"\" class=\"wp-image-31976\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-6-1024x633.png 1024w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-6-300x186.png 300w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-6.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">The finding that surprised us was that the beta is less than 1.0, so the optimal hedging ratio would be less than $1 in the BTC futures for every $1 in the cold storage. We expected the opposite.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-sheets-root=\"1\" data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;- 2. rolling regression - long portfolio, hedge podla regresie - problem, ze cim kratsie okno, tym dava nizsiu slope a teda nam to podhedgovava, a teda nam ostava velky residual - velka beta na index&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12801,&quot;3&quot;:{&quot;1&quot;:0},&quot;12&quot;:0,&quot;15&quot;:&quot;Arial&quot;,&quot;16&quot;:12}\">3. Rolling Regression<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">This variant is going long portfolio and hedging with BTC according to yearly regression, which gets new data, adjusts each year&#8217;s end, and rebalances accordingly on the first day of the new\/next year.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"633\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/01\/image-7-1024x633.png\" alt=\"\" class=\"wp-image-31979\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-7-1024x633.png 1024w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-7-300x186.png 300w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/01\/image-7.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">The problem here is that using shorter timeframe windows gives us a lower slope, which makes us dimensionally underhedged. This leaves us with a high residual and high beta on the index, which is not optimal for our purpose.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Active hedging strategy<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Ok, let&#8217;s continue. In the first part of the article, we checked some naive hedging methods to remove the portfolio beta and now we can continue and built some simple hedging strategy that stems from our older article <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/trend-following-and-mean-reversion-in-bitcoin\/\">Trend-following and Mean-reversion in Bitcoin<\/a>. We will use the trend-following signal to selectively hedge the cold-storage portfolio.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So, we propose to include the following rules in a simple manner decision-if-then-tree manner:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>if I am at a BTC x-day high, I prefer not to hedge cold-storage portfolio;<\/li>\n\n\n\n<li>if I do not fulfill such conditions, I hedge cold storage through some instrument (near-term <em>BTC<\/em> or perpetual [<em>PERP<\/em>]) futures (for the sake of simplicity, each $1 of the portfolio is hedged 1:1)<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">And now, finally, delve into the bread-and-butter part.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Results<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Firstly, the performance of the BTC\/T5 index (in cold storage) from the year 2015 to 2019 and from 2019 onwards is shown.<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"600\" height=\"371\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/chart.png\" alt=\"\" class=\"wp-image-32887\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/chart.png 600w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/chart-300x186.png 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/figure>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"600\" height=\"371\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/chart-1.png\" alt=\"\" class=\"wp-image-32888\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/chart-1.png 600w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/chart-1-300x186.png 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/figure>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"789\" height=\"106\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/2015-2019_all.png\" alt=\"\" class=\"wp-image-33076\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2015-2019_all.png 789w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2015-2019_all-300x40.png 300w\" sizes=\"(max-width: 789px) 100vw, 789px\" \/><\/figure>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"797\" height=\"107\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/2019_all.png\" alt=\"\" class=\"wp-image-33075\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2019_all.png 797w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2019_all-300x40.png 300w\" sizes=\"(max-width: 797px) 100vw, 797px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Secondly, let&#8217;s analyze the alternative strategy that employs the cold storage and hedges it with a BTC future with the above mentioned rules (hold cold storage without a hedge if we are at X-day high, otherwise, hedge with a BTC future)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As always, graphs and tables (from 2015 and 2019).<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"600\" height=\"371\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/2015_BTC_hedge.png\" alt=\"\" class=\"wp-image-32893\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2015_BTC_hedge.png 600w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2015_BTC_hedge-300x186.png 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/figure>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"600\" height=\"371\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/2019_BTC_hedge.png\" alt=\"\" class=\"wp-image-32894\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2019_BTC_hedge.png 600w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2019_BTC_hedge-300x186.png 300w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Since 2015<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"903\" height=\"168\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/2015_long_hedged.png\" alt=\"\" class=\"wp-image-32883\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2015_long_hedged.png 903w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2015_long_hedged-300x56.png 300w\" sizes=\"(max-width: 903px) 100vw, 903px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Since 2019<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"905\" height=\"167\" src=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/wp-content\/uploads\/2024\/02\/2019_long_hedged.png\" alt=\"\" class=\"wp-image-32884\" srcset=\"https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2019_long_hedged.png 905w, https:\/\/vvv.quantpedia.com\/wp-content\/uploads\/2024\/02\/2019_long_hedged-300x55.png 300w\" sizes=\"(max-width: 905px) 100vw, 905px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">We can see that we can relatively successfully employ the hedging strategy and retain the majority of the returns of the cold-storage portfolio. For example, from the year 2019 until 2023, the cold storage portfolio registered a 57% gain with a 67% volatility and -a 77% drawdown. Our hedging strategies (mainly those that use the shorter X-day high signals) registered returns between 44% and 47%, with halved volatility (34-43%) and a fraction of the maximal drawdown of the passive cold-storage portfolio (-22% to -37%).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Of course, the non-hedged cold-storage portfolio would probably also have higher returns in the future. However, it would be unwise not to consider hedging at least a portion of the portfolio with BTC derivatives. A little lower returns are not a high price for a good night&#8217;s sleep.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Endings and Conclusions<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The cryptocurrency market is extremely volatile, and a lot of the participants are accustomed to the wild swings in the price. However, it doesn&#8217;t make sense to tolerate that large swing all of the time when there are options for dampening the volatility of the portfolio a little. Hedging variant + cold storage provides a very good tradeoff for people who want to have crypto in their own hands, their own paper or hardware (both represent so-called cold) wallets, but on the other side, want to mitigate the most adverse effects of the price swings.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\" id=\"block-854363cc-8450-4dc0-a06a-c737766e9431\"><strong>Are you looking for more strategies to read about? <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/sign-up-for-our-newsletter\/\">Sign up for our newsletter<\/a> or visit our <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/blog\/\">Blog<\/a> or <a href=\"http:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/Screener\">Screener<\/a><\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\" id=\"block-65925002-6290-4d3b-b5cd-f3a277851ec8\"><strong>Do you want to learn more about Quantpedia Premium service? Check <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/how-it-works\/\">how Quantpedia works<\/a>, <a href=\"http:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/Home\/About\">our mission<\/a> and <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/pricing\/\">Premium pricing offer<\/a>.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\" id=\"block-34bf63ae-5a22-40a3-aeb4-769374e833d8\"><strong>Do you want to learn more about Quantpedia Pro service? Check its <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/how-it-works\/quantpedia-pro\/\">description<\/a>, watch <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/how-it-works\/quantpedia-explains\/\">videos<\/a>, review <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/how-it-works\/quantpedia-pro-reports\/\">reporting capabilities<\/a> and visit our <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/pricing-pro\/\">pricing offer<\/a>.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\" id=\"block-21942b3a-14d9-4c0f-b8ef-04d64675e253\"><strong>Are you looking for historical data or backtesting platforms? Check our list of&nbsp;<a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/links-tools\/?category=algo-trading-discounts\">Algo Trading Discounts<\/a><\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Would you like free access to <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/pricing\/\" title=\"\">our services<\/a>? Then, <a href=\"https:\/\/lightspeed.com\/lp\/quantpedia-lightspeed-financial-services-group-one-free-year-promotion\" title=\"\">open an account with Lightspeed<\/a> and enjoy one year of Quantpedia Premium at no cost.<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\" id=\"block-4c45d6c9-c8dd-4283-8743-bf573cfa4d45\"><strong>Or follow us on:<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\" id=\"block-476e95ed-31a5-4c4d-b701-5203f9fb2e24\"><strong>Facebook <a href=\"https:\/\/www.facebook.com\/groups\/quantstrategies\">Group<\/a>, Facebook <a href=\"https:\/\/www.facebook.com\/quantpedia\/\">Page<\/a>, <a href=\"https:\/\/twitter.com\/quantpedia\">Twitter<\/a>, <a href=\"https:\/\/www.linkedin.com\/company\/quantpedia\">Linkedin<\/a>, <a href=\"https:\/\/quantpedia.medium.com\/\">Medium<\/a> or <a href=\"https:\/\/www.youtube.com\/channel\/UC_YubnldxzNjLkIkEoL-FXg\">Youtube<\/a><\/strong><\/p>\n\n\n","protected":false},"excerpt":{"rendered":"<p><strong>Cryptocurrencies are already one of the major asset classes. They fill the top pages of magazines and are a topic of a day to day conversation. <a href=\"https:\/\/\\\/\\\/new-fmhwbzh6ghd9hede.swedencentral-01.azurewebsites.net\/an-investors-guide-to-cryptocurrencies\/\"><strong>There are a lot of ways to buy them through a lot of different channels<\/strong><\/a>. But some of the hardcore HODLers like to keep their coin portfolio safe &#8211; they buy a portfolio of cryptocurrencies and hold them in cold storage. It has a lot of advantages (you will probably not become a victim of hacking if your crypto coins are in cold storage in your wall safe) but also some disadvantages (your cold storage device can become unreadable or destroyed). One of the disadvantages of cold storage is that while you hold the cryptocurrencies in your cold storage, you are exposed to the price swings of the cryptocurrency market (which can be tremendous). But do you need to have this risk, especially when the market is at an all-time high? What if you smartly hedged a portion of your portfolio? The goal of this article is to serve as an inspiration for a hedging strategy for your cold storage cryptocurrency portfolio. We do not say this is the only way to run a hedging strategy, but we would like to inspire you to start thinking about this possibility even when you have not considered it yet. Are you ready? Then let&#8217;s go \ud83d\ude42<\/strong><\/p>","protected":false},"author":25210,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[178,84,219,51,159,48],"class_list":["post-30805","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-asset-allocation","tag-cryptocurrencies","tag-hedging","tag-market-timing","tag-own-research","tag-trendfollowing"],"_links":{"self":[{"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/posts\/30805","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/users\/25210"}],"replies":[{"embeddable":true,"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/comments?post=30805"}],"version-history":[{"count":0,"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/posts\/30805\/revisions"}],"wp:attachment":[{"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/media?parent=30805"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/categories?post=30805"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vvv.quantpedia.com\/es\/wp-json\/wp\/v2\/tags?post=30805"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}