How Can A Trader in this Business Protect Themselves Against Volatility Risk?

[2030hodl]

Hi Bitcoin Talk,

I’m trying to understand the mechanics of how a small “OTC?” trader makes income through cash trades on LocalBitcoins, HodlHodl, LocalCoinSwap etc.

I want to start making these trades myself. Can anybody give some comments or notes if my understanding is correct?

———

Exercise: The goal of Trader A is to increase his holdings of BTC and USD, while minimising losses.

———

Let’s assume the current exchange rate is 1 BTC = $10,000 USD

Let’s say Trader A currently has a balance of 1 BTC and $10,000 USD.

On HodlHodl, Trader A sets his:

SELL price of BTC for 10% OVER the spot rate, so he is selling 1 BTC for $11,000 USD

and

BUY price of BTC for 10% UNDER the spot rate, so he is buying 1 BTC for $9000 USD

Now, here’s where i’m confused…

How does Trader A protect himself against volatility in the price of BTC?

Let’s say he meets someone who he sells 0.5 BTC to, for $5500 in Cash, USD

So he currently has 0.5 BTC and $15500 USD in his possession.

Now, between trades, the price of BTC raises by 25%. Now, 1 BTC = 12500

Trader A still has 0.5 BTC and $15500 USD in his possession.

Now, he meets someone to buy 0.5 BTC from them at $5625

Now his portfolio consists of 1 BTC and 15500-5625= $9875.

Trader A has a smaller portfolio than he began with.

———

I spoke to an individual making money through trades with a 5% spread on LocalBitcoins. He explained that he has so much volume going through him (almost 50/50 buyers and sellers) that he does not worry about volatility risk because of the spread + volume. I am afraid he may be ‘caught out’ by one of BTC’s sudden price appreciations. Am I missing something vital here?

———

How can a trader in this business protect themselves against volatility risk?

Is the solution to have a Cash & BTC balance on an exchange, which they use to quickly realise their spread, once a sale in real life is executed to protect against volatility risk (with the expense of exchange fees and slippage)?

Any comments, questions or discussions are welcome. Or if this has already been covered in a thread, could anyone point me towards the adequate reading material?

My goal is to accumulate as many BTC as possible for my HODL stash.

Thanks.  

[Darooghe]

This is an issue with crypto in general at the moment. Because of the speculation and the lack of mass adoption we still have a lot of upside potential. I’d imagine we’re at least 5 years maybe even ten years away from stability. However, exposing 100% equity in market is too risky and it is going to alter your daily life due to the fear of losing money. Market is always volatile, most important fact about keeping your nerves is invest small percentage of your savings in market with a good ratio portfolio with different coins like Bitcoin, ETH, Litecoin and more stable coins like Doge.

[Wexnident]

Planning. Planning, preparations, stop loss, those kind of things. That's why trading can be quite difficult at times, especially with crypto right now, since its volatility isn't really to be underestimated. If Trader A was on a constant watch about the market price of BTC to USD, he would've been able to notice the change and make changes right? There's also the option of using bots to manage your portfolio, meaning to cancel trades once a certain threshold has been met or something like that.

[kawetsriyanto]

Planning. Planning, preparations, stop loss, those kind of things.

Yes. Planning is a must and set reasonable targets. Don't too greedy to gain bigger profits, it possibly ends with severe losses. Then, a trader also should know the characteristics and trends in crypto market. Once it is a rising phase, we must know when to trade our assets. I mean don't wait too long till the prices decline again, we will miss the best time. And don't forget to set stop loss once we think it won't take advantage to hold longer.

That's why trading can be quite difficult at times

Not only this time because volatility happens every time. It is the nature of crypto coins/tokens prices. That's why we call high risks to trade in crypto. But if we have worked as a crypto trader for years, we must know when it will tend to rise and when to decline. We just need to take advantage of these two basic phases (rising and decline). I admit that trading crypto is a bit tricky.

[Coyster]

The only way a trader can avoid volatility with bitcoin is if the market itself becomes stable and involatile, but for now, it's not. So many users have asked this question, how can you avoid loss in a volatile market: Since you cannot predict what will happen when investing, using funds you can afford to lose is advisable, since volatility is beyond your control, controlling the amount of funds that'll either be giving you profit or loss is a good strategy to reduce the effects of volatility.

Stop loss also helps a trader to maintain a minimal amount of loss and inevitable volatility, you can try using the feature, and set it up based on your preference, but if you want a stable market, then cryptocurrency trading isn't for you.

[beerlover]

Have you ever considered the possibility that, trader may not make those trades? I mean simply to say a trader may make trades that would lose him money is simply saying like, "maybe I don't want to make a profit?" , doesn't make any sense.

Yes, maybe that trader had something urgent and had to cash out his money, which I would understand, but why would any trader sell on purpose to make a loss? They simply wait longer, if they have 1 btc and 10k, they simply just get it when it is cheap and do not sell until they make a profit, that way they know there is no way they can lose money, they can only lose time. Even the damn miners who mine coin and sell the costs, keep the rest of the profit in bitcoin just to make more money when bitcoin goes higher, we are in that kind of market, waiting is crucial.

[buwaytress]

I'll share some of my experience here re volatility, and how some of it doesn't affect P2P on Localbitcoins anyway.

At an exchange, you might experience flash crashes or flash spikes -- and even changing orders from second to second. An open offer from LBC will auto adjust depending on your algorithm to the market average, and if you observe it doesn't change much at all from second to second. Might change every minute or so, but it's pretty stable.

It's in your interest, therefore, to settle trades as quickly as possible. You can still get caught out, but if you have enough trades open in enough markets, you presumably sell as you buy. Some traders will cancel when price moves against them and that's not against the rules but it'll get you bad feedback. Just sell only when online, and as soon as offer is accepted. And when buying, buy on a trader you know well and is also online, who'll sell asap.

The spreads are quite big too. Definitely wider than 1% and that's ensuring you put your offers better than average ones.

[ShowOff]

-snip-
I admit that trading crypto is a bit tricky.

High risk and tricky. Can these two reasons be said to be two things unique from cryptocurrency trading?

Whether trading is complicated or not depends on who and how to do it. Those who are good at doing analysis might find it easier to determine when to buy and when the right time to sell. Difficulties will be felt by traders who do not have the experience and knowledge where they only hope and hope that prices continue to rise and they benefit from price spikes in the market. They only know that trading is profitable, but they dont realize that the huge risk of losing capital lurks them.

Therefore trading is not recommended for anyone who still does not know how to market this cryptocurrency and does not have much experience. I think cryptocurrency trading is not suitable for trial and error reasons because when something bad happens, the risk posed is real.

[enhu]

You can actually make your price as the market price of BTC which no matter what the current price may be, you still have the exact amount to which you can't consider it loss. Buy order will at least be your best profiteering tool because you can always ask for more and this is the reason why during days when Iran and US has tension, the price in LBC Iran rocket up to 24K USD.

[nicolas1979]

I think you really don't like volatility but in market, volatility is road to make money. Our protection way is using stop loss and money management, this is limit we can't break. Some people split their asset or replace money in stable coin, that's also protection. People get lost is just because they don't set management risk and obey it. For me you only need to fix your mindset about volatility and set your risk parameter to get success, that's it.

[marilynmanson21]

there is no way to protect yourself from volatilityccryptocurrency, if you want to be safe from volatility then the solution is to get out of the market and not trade or invest in cryptocurrency.
but actually if you only hold, then you are safe from volatility, because now it is in the bullish area,

[The Cryptovator]

Since crypto nature is volatile you can't ignore it. If you worry P2P exchange like localbitcoin, how traders protect themselves against volatility, then they have some experience how to avoid loss. I believe regular local resellers do not hold crypto for longer. Because buy/sell is their business. So only way I see that they sold their crypto within short time after bought. If in case during sell price dump due to volatility then they have to cancel order or they have to loss. There is no any other way to avoid volatility if you are dealing with crypto. I think local sellers couldn't be gainer all the time.

[ashmodeus]

can't be avoided i guess.
for somehow , i just think they actually and should be know well about Volatility Risk after all.
i dont think even pro trader though never get a loss from Volatility.
price alert,signal,prediction,speculation,etc. its kind of things needed for trader.

[buwaytress]

I think you really don't like volatility but in market, volatility is road to make money. Our protection way is using stop loss and money management, this is limit we can't break. Some people split their asset or replace money in stable coin, that's also protection. People get lost is just because they don't set management risk and obey it. For me you only need to fix your mindset about volatility and set your risk parameter to get success, that's it.

Volatility is also the same road to make losses, really, and judging from proven statistics that show the majority of traders lose money, I'm pretty sure a lot of traders in forex and crypto will know exactly volatility bites both ways, and if you want to trade, you first have to beat the spread and commission -- so you're immediately in a losing position as soon as you open a trade.

You can still lose even with good risk management, don't get fooled by thinking you can avoid it completely. But you can at least prevent catastrophe.

[pajak666]

You simply don't make a trade for your whole capital sir This is true for every business. If you are profiting on spread and buying/selling currencies then you are fighting variance by having shitload of money. On the average the scenario you have mentioned will have such an outcome about half the time, the other half buy it back even cheaper and substantially increase your portfolio. You need a stash of cash, and time. You keep both BTC and fiat and simply trade it. You can use simple rebalancing techniques in between to keep your desired fund allocation.

[dunfida]

I think you really don't like volatility but in market, volatility is road to make money. Our protection way is using stop loss and money management, this is limit we can't break. Some people split their asset or replace money in stable coin, that's also protection. People get lost is just because they don't set management risk and obey it. For me you only need to fix your mindset about volatility and set your risk parameter to get success, that's it.

Volatility is also the same road to make losses, really, and judging from proven statistics that show the majority of traders lose money, I'm pretty sure a lot of traders in forex and crypto will know exactly volatility bites both ways, and if you want to trade, you first have to beat the spread and commission -- so you're immediately in a losing position as soon as you open a trade.

You can still lose even with good risk management, don't get fooled by thinking you can avoid it completely. But you can at least prevent catastrophe.

This is why i did quit this kind of business due to volatility.Its bearable but a yet a very stressful thing imho because your main problem is the price movement.

Lots of trials and errors been doing in the past but it seems my risk management and all sorts of factors that do decrease out profitability didnt work out for me.
Maybe for others but not mine.100% protection isnt possible but somewhat can be lessen up.

[leowonderful]

This is why i did quit this kind of business due to volatility.Its bearable but a yet a very stressful thing imho because your main problem is the price movement.

Lots of trials and errors been doing in the past but it seems my risk management and all sorts of factors that do decrease out profitability didnt work out for me.
Maybe for others but not mine.100% protection isnt possible but somewhat can be lessen up.

100% protection against (I assume losses?) isn't possible if you're looking for any decent amount of returns, because you're almost always going to find at least some risk in every position you ever consider entering, though the level of risk varies based on market conditions and the sizing of your positions and such. It's unfortunate that you weren't able to develop an effective risk management plan, but many people never do and it's one of those things that people are also generally unwilling to share, though it's also entirely possible you just had an unlucky streak during that time too.

[AniviaBtc]

This is why i did quit this kind of business due to volatility.Its bearable but a yet a very stressful thing imho because your main problem is the price movement.

Lots of trials and errors been doing in the past but it seems my risk management and all sorts of factors that do decrease out profitability didnt work out for me.
Maybe for others but not mine.100% protection isnt possible but somewhat can be lessen up.

100% protection against (I assume losses?) isn't possible if you're looking for any decent amount of returns, because you're almost always going to find at least some risk in every position you ever consider entering, though the level of risk varies based on market conditions and the sizing of your positions and such. It's unfortunate that you weren't able to develop an effective risk management plan, but many people never do and it's one of those things that people are also generally unwilling to share, though it's also entirely possible you just had an unlucky streak during that time too.

Risk is always needed for you to have some possible good or bad transactions in trading. But do you think that you will take a risk without technical analysis in the market? Technical Analysis is a very cliché word in cryptocurrency but it does help a lot of traders. It is based on your own observation and analyzation that's why you have a guide in trading. You can protect yourself from volatility if you have plans and strategies. Some how, luck is still included in those factors because it will urge you to win in crucial moment in bitcoin transactions. Trading is not that easy that's why beginners are the prone to volatility risk in blockchain technology. If you're not knowledgeable enough about the market, and if you will not take the opportunity to take the risk then it's your loss.

[magneto]

It's very simple for anyone to open a futures position on an exchange such as Bitmex or Deribit.

I suspect that big time traders on LBC with actual risk management plans and low spreads will open offsetting positions on derivatives exchanges so that the price action of BTC in the short run doesn't negatively impact them.

I know for a fact that precious metals dealers use this to protect themselves from volatility of silver/gold prices, but I can't be 100% sure that this is commonplace in p2p trading. It is definitely a good way to manage exchange rate risk, while retaining the profits you've got on the spreads, though.

[FanEagle]

You simply don't make a trade for your whole capital sir This is true for every business. If you are profiting on spread and buying/selling currencies then you are fighting variance by having shitload of money. On the average the scenario you have mentioned will have such an outcome about half the time, the other half buy it back even cheaper and substantially increase your portfolio. You need a stash of cash, and time. You keep both BTC and fiat and simply trade it. You can use simple rebalancing techniques in between to keep your desired fund allocation.

Excess amount of bitcoins as well as fiat would be required in order to execute such trades. It is never easy for the OTC traders to buy and sell constantly in the huge price variations. You would need to establish your profile onto such exchanges like localbitcoins so that you can afford to gain a lot of buyers and sellers which would make you uplift your portfolio.

High volatile markets can give you risk but not in a situation where a seller sells his coins to you and eventually you instantly sell those bitcoins to the buyer.

This would quickly make you bear profits without any risk of the price drop. But you might have to face some kind of loss in case where seller sells you some bitcoins and the price drops quickly after the trade is executed and the buyer buys some amount of bitcoins in this dip. This would make you bear a loss indeed.