Recently, crypto market, and even the entire financial markets are filled with sadness of investors. The price of bitcoin dumped from around 10k to half of it and the Nasdaq suffered a couple of trading curb within a week which happened only once in the past century. Today we will be focusing on crypto market, providing analysis regarding why this severe drop is happening and some guidance on how to minimize the losses in such market conditions.
Starting from China, coronavirus has been a common issue that affects the whole world. Similar to other financial markets, the direct cause of bitcoin is also the uncertainty and fear market sentiment brought by the disease.
Without a certain anticipation of when it is going to end, people are selling off most of their investments to prepare enough cash to hedge the potential risk and maintain their daily life. Nearly all the financial markets are experiencing the same thing and we may say this situation will go on unless the governments can push off powerful regulations and solutions to control the spread. China made it within two months, but considering the differences among countries, this coronavirus world-wide may still continue at least one to three months, along with market downtrend.
Bitcoin production halving
The sad situation of the disease is not the only reason for the bitcoin drop, though it is the major and most direct reason.
Bitcoin block reward halving will take place within two months. This is the third time of bitcoin halving and the coin reward of each block drops from 12.5 to 6.25. It is considered to be the biggest positive news in the crypto world and the market were going through pumps/dumps nearly around every halving activity. For example, during the second halving which took place on July,9 2017, the price of bitcoin increase from $900 to the peak nearly $3000 at the beginning of May and then started to fall.
This similar price trend happened again that bitcoin grows from $7000 in last December to above $10000 in Feburary, then the price started to drop before the actual halving takes place. We can see that an uptrend followed by a downtrend before the halving is a routine market trend. The only difference is that it coincides with the outbreak of COV-19 this time, which brings the price drop earlier and extends its intensity.
Hedge your risk with derivatives
One advantage that we can say about this huge market drop is that the heartbroken feeling brought by the loss can be a really good signal for all traders to start thinking about and optimize the hedging strategy.
Traders usually hold a prejudice on futures and contracts market. With a big leverage adding on each order, traders usually stay far away from it to avoid the potential risk. Actually, it is a very good tool for traders to hedge their risk of holding the asset.
For example, if you can open a short position on a crypto derivatives trading platform with a 10x leverage, you can nearly offset your loss with only approximate 1/10 of the crypto asset you are holding as the margin.
With the ability to add leverage and short positions, the crypto derivatives platform should be used for every trader to deploy their hedging strategy, especially in these unstable market situations.
The extensive dump in crypto markets has shocked almost all traders and people are starting to sell off what they hold. However, by analyzing previous bitcoin halving, this price drop should be more or less expected. Due to the unpredictability of the COV-19 situation, the market will remain uncertain in a rather long period of time. Therefore, traders should start to use crypto derivatives to start and optimize their hedging strategy.