Blood. Everywhere. The combined market cap of cryptocurrencies has declined from a staggering $3 trillion in November 2021 to $1.2 trillion as of this writing. From an all-time high of $69,000 on Nov.10, Bitcoin has tumbled to $28,000. In fact, the OG crypto has traded lower for eight consecutive weeks, the longest continuous string of red weekly candles in history.
Ether, the leader of the altcoin pack, has lost 65% of its value since the November 2021 high. Many other coins like Solana and Chainlink are down approximately 80% from their respective peaks. That’s what a bear market looks like in the wild world of crypto. The stock markets enter bear territory when they fall 20%, but a 20% decline is just a regular Thursday for crypto.
Capital.com’s Pulse Q1 2022 report reveals that cryptocurrencies witnessed a steady decline in investor participation throughout the first quarter after starting the year on a high in January. Traders of digital assets on Capital.com dropped 16% in February and a further 10% in March.
The continued slide of cryptocurrencies since November 2021 explains the growing disinterest in crypto assets among retail traders. What’s surprising is that commodities overtook cryptocurrencies in terms of trader participation during Q1 2022, according to the Capital.com report. The recent buoyancy in raw-material prices drew traders away from the volatility in equities and cryptocurrencies towards commodities.
In such a brutal market, many traders and investors are left wondering what moves they should make to mitigate the downside risk and, hopefully, recoup the losses.
Passive income strategies?
Veteran investors don’t merely HODL and see their wealth erode in a bear market. They set themselves apart from the less fortunate ones by focusing on ways to reduce risk while setting their portfolios up for massive future gains. Passive income strategies like staking, liquidity mining, and lending help them earn predictable rewards.
For instance, Cake DeFi offers users liquidity mining rewards of up to 45% on popular currency pairs such as BTC-DFI and ETH-DFI. It also lets you lend your cryptocurrencies like Bitcoin, Ethereum, USDT, USDC and others at up to 6.5% APY.
Those interested in staking can join fully transparent masternode pools on Cake DeFi to earn staking yields of up to 30% in real-time, without the complexity of running nodes. During the first quarter of 2022, Cake DeFi paid out $73 million in rewards to its users despite the falling crypto prices.
For the uninitiated, staking is when you put your Proof of Stake (PoS) coins towards transaction validation on the blockchain network. Liquidity mining aka yield farming is a DeFi mechanism where you deposit your crypto assets into various liquidity pools to earn rewards in the form of tokens and fees.
These strategies allow investors to make decent gains during good times, and reduce the losses when times are tough.
Derivatives: A useful tool in bear markets
Crypto derivatives have witnessed explosive growth over the last few years. They are an integral part of any financial system, and crypto is no exception. Derivatives are contracts that get their value from an underlying asset or index such as stocks, cryptocurrencies, stablecoins, and more.
Since the value of derivatives comes from the underlying asset, you can enter into a derivatives contract to speculate on the price, use leverage, or hedge your risk exposure. Hedging is a far better option than waiting for the price to recover or liquidate holdings at an unfavorable price.
Beginner investors often stay away from derivatives because these instruments are relatively risky, especially in leveraged contracts. But innovative platforms like HyperDex are making it easier for beginners to protect their portfolios in bear markets. HyperDex is a DeFi asset management platform that overcomes the many barriers to effective, efficient finance.
HyperDex’s Race Trading Cube enables users to speculate on the outcomes of future prices of selected crypto assets. Users make a prediction on the future price, then HyperDex Race Cube automatically calculates the necessary information for the user’s stops, position in the market (long / short) along with proper leverage according to the user’s risk profile. The main advantage here is tailored for inexperienced traders, who will benefit from a structure that is easy to understand.
Two of the most popular derivatives are the futures and options. Futures are contracts for the purchase and delivery of an asset at a predetermined price on a future date. Both parties have an obligation to carry out the contract as agreed.
Options are different in that they give buyers the “right” but not the “obligation” to buy the asset. You have to pay a premium to avail the right, and when the time comes, you have the freedom to choose whether to exercise the right or let the contract expire.
A “call” option is the right to buy the underlying asset. The right to sell is a “put” option. Traders can use call and put options to reduce the risk at a reasonably low cost. Depending on where you expect the prices of your favorite cryptocurrencies to be in the future, you can use options to hedge your portfolio or benefit from the upside.
However, if you are sure about the direction but not about the time-frame, you could use perpetual futures to play it safe. Perps, as they are often called, don’t have an expiry date. You can keep your contracts as long as you want, though you have to pay a small fee called the funding rate.
AAX, one of the world’s leading derivatives exchanges, offers a wide variety of perpetual futures contracts backed by BTC, ETH, DOT, and other cryptocurrencies. It allows you leverage of up to 100x. Unless you’re forced to liquidate upon hitting the point of maximum loss, you’re in full control when you want to exit the market.
AAX uses cutting-edge technology to position itself for growth in 2022 and beyond. In fact, it is the first-ever digital asset exchange to run on LSEG Technology’s Millennium Exchange, the same matching engine driving tier-one capital markets.
What are the derivatives markets telling you?
According to the blockchain analytics firm Glassnode, perpetual futures have become insanely popular. As of May 23rd, open interest in the futures market hovered around $15 billion, with perpetual futures accounting for 67% of the total.
The derivatives market also gives you indications of what crypto traders are expecting and betting on. They are largely expecting another major downward move in Bitcoin prices. Glassnode said in its latest report that the derivatives market is signaling fear of further downside, at least for the next 3-6 months. Uncertainty and downside risk looms large in the short-term.
In such a painful market, no wonder investors are more inclined towards put options. The put/call ratio for open interest has jumped from 50% to 70% in the last couple of weeks as investors hedge their positions against further downside.
For the remainder of Q2, there’s a clear preference for put options with strike prices of $25K, $20K, and $15K. The pool of open call options is much smaller, and the investor interest is concentrated around the $40k strike price.
In the longer-term, options open interest at the end of 2022 reflect optimism. There is a clear preference for call options, with concentration around strike prices of $70k to $100k. It indicates that the markets are uncertain about the short-term but have a more constructive view out to the year’s end.
Closing thoughts
We don’t know when the bear market will end, but we do know that the bearish sentiments tend to get a lot worse before optimism starts kicking in. Passive income strategies and, more importantly, derivatives are the most useful tools at the disposal of crypto investors. Crypto derivatives trading is a great option for both beginner investors and seasoned ones alike. Depending on how much risk you’re willing to take, you can go with various derivatives products to not only protect your portfolio but also set it for massive gains.
