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Author Topic: ~On Hedging~  (Read 4570 times)
Post-Cosmic
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June 22, 2014, 01:16:17 AM
 #1

 To those sometimes tempted, when faced with falling bitcoin prices, into investing (without looking to actively trade) their funds into altcoins, I say this : Anyone with BTC in their 'Cold Storage' wallets is already hedging. You don't hedge, aka hold long-term passively, into something LESS reliable. You do so into whatever is most likely to be reliable in the long term.

 Currencies are worthless in basis, other than maybe a theoretical / conceptual 'value' for the proof of economic concept & behavioral motivator tool they represent. That's it. Currencies otherwise gain their value from people knowing, with varying degrees of reasonable certainty (the degree to which is indeed priced in & contributes majorly to said currency's price), that SOMEONE out there is gonna give them X value for Y amount/units of this currency.

 So now we've established, the fundamental, real value of a currency to rely on outside of the volatile market speculation price swings, is based on what someone else is going to trade me for this currency, will he continue to accept it as payment, etc..? That means the more legitimate & well-infrastructure'd a currency is the more value it gains. That's what fiat is. From US Dollar to Euro, everyone accepts them, knows they have lasting, stable, protected value, etc. The same goes for BTC, at least when compared to these temporary hype bandwagon altcoins.

 People trade BTC. They send/receive it, they shop with it, they pay for services, they tip, there is a real use as a basis of its value, & billions of $$$ of infrastructure have been & still are being developed in & around BTC. That's why it's reliable long-term. It won't just drop to $100.
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DannyElfman
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June 22, 2014, 01:33:21 AM
 #2

You can hedge on different time frames. But I agree, altcoins are no hedge -- certainly not in the traditional form of the word.

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kittucrypt
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June 22, 2014, 01:37:34 AM
 #3

The fact that price of most altcoins are so highly correlated with those of bitcoins...it is a weak weak hedge(altcoins).

Marlo Stanfield
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June 22, 2014, 11:30:06 AM
Last edit: June 24, 2014, 09:27:43 AM by Marlo Stanfield
 #4

Altcoins are actually an interesting proposition because as we can see they often go up when bitcoin goes up. And on the other hand if there are problems with bitcoin that don't affect an altcoin, then it's likely that a lot of people will be selling their bitcoin to buy that specific altcoin.

So there are at least two likely scenarios where bitcoin can both rise or fall and someone holding an altcoin can benefit either way. Which makes it a fairly attractive investment.

Except the hardest part is knowing which altcoins out of the hundreds are actually worth investing in. There are so many factors that the level of knowledge needed becomes the primary barrier for anyone wanting to invest at an early point.

Eventually we'll likely see one or two altcoins pull away from the pack with an obviously superior technology and a solid dev team supporting them. In which case it will be clear that those are the obvious investments.
Post-Cosmic
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June 23, 2014, 07:36:50 PM
 #5

The fact that price of most altcoins are so highly correlated with those of bitcoins...it is a weak weak hedge(altcoins).

 Hasn't been the case since at least around March this year.

 That's because when BTC bubbled uncontrollably last year and before that, it was such a huge % development making waves in the entire cryptoworld that altcoins' prices were also affected, disproportionately so as vast amounts of new capital (chinese mostly) flowed in & some of it was put into alts from a gamble on the old "If the original succeeded this much, then surely its derivative counterparts might also, and w/ a lot more room to grow in price relative to the already-inflated original's".

 Starting earlier this year, the long-trend BTC price sideways movement along w/ the new algorithm developments have put an end to this BTC/Alts piggybacking correlation, as the marketplace generally has grown to demand serious, relevant innovation from all altcoins being developed, or else they should quickly fade into obscurity.
IIOII
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June 24, 2014, 12:03:29 AM
Last edit: June 24, 2014, 10:50:48 PM by IIOII
 #6

Altcoins used to be a reasonable shortterm hedge against Bitcoin when there were much fewer altcoins at the marketplace. I can remember big price gains for litecoin and namecoin during bitcoin crashes in the past. But such times are largely over.

Now the marketplace is flooded with hundreds of altcoins which compete against each other, weakening the foothold of each individual altcoin.
Harley997
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June 25, 2014, 02:55:13 AM
 #7

Altcoins used to be a reasonable shortterm hedge against Bitcoin when there were much fewer altcoins at the marketplace. I can remember big price gains for litecoin and namecoin during bitcoin crashes in the past. But such times are largely over.

Now the marketplace is flooded with hundreds of altcoins which compete against each other, weakening the foothold of each individual altcoin.
Altcoins may be a good hedge for bitcoin but it is priced in bitcoin. In order to truly hedge your bitcoin price risk you must price your risk in something other then bitcoin

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twiifm
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June 25, 2014, 03:10:07 AM
 #8

Theres no hedge for bitcoins.  Hedging is taking both sides of trade.

For example hold long bitcoin position.  Sell bitcoin call option.

Since theres no options market for bitcoin theres no hedge
trader001
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June 25, 2014, 04:14:19 AM
 #9

You only hedge if you are mining bitcoin and want to reduce your production cost risk.
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June 26, 2014, 07:52:30 AM
 #10

I guess I agree intuitively with the premise that alt coins are more risky, and not a sound hedge. If I wanted a short term hedge (eg. I held a long position in BTC and was concerned that BTC would fall relative to fiat) I'd use a call option (for example).

But, honestly, I'm bullish (and lazy!) and believe BTC will do just fine in the long term (I'm a hodler, not a trader, obviously).

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Feneusens
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June 26, 2014, 01:08:44 PM
 #11

Altcoin is some form of hedging but not much. It only help if BTC get 51% attack then the 2nd biggest would benefit the most. Litecoin Smiley

chris45215
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June 27, 2014, 04:04:42 AM
 #12

The idea of "hedging" Bitcoin by buying altcoins is ridiculous - it's the exact opposite of hedging, as altcoins are more risky than bitcoin. Hedging is done to reduce risk by taking a position that is opposite to an existing position.

The only way to hedge bitcoin that you own is to shortsell bitcoin. To a limited extent, a person could buy derivative contracts to lock a sell price, but the bitcoin ecosystem does not have a particularly good system for this.
DrGregMulhauser
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June 27, 2014, 04:22:27 PM
 #13

Theres no hedge for bitcoins.  Hedging is taking both sides of trade.

For example hold long bitcoin position.  Sell bitcoin call option.

Since theres no options market for bitcoin theres no hedge

Strictly speaking, hedging does not mean "taking both sides", it means taking positions which move in opposite directions -- such as in your example of a long position coupled with a short call against the position.

In addition, the list of types of positions which might move opposite to a long position in BTC is not exhausted by options; futures (e.g., ICBIT) and leveraged CFD-style products (e.g., BTC.sx) can perform a similar function.

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ShakyhandsBTCer
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June 27, 2014, 09:51:21 PM
 #14

Theres no hedge for bitcoins.  Hedging is taking both sides of trade.

For example hold long bitcoin position.  Sell bitcoin call option.

Since theres no options market for bitcoin theres no hedge

Strictly speaking, hedging does not mean "taking both sides", it means taking positions which move in opposite directions -- such as in your example of a long position coupled with a short call against the position.

In addition, the list of types of positions which might move opposite to a long position in BTC is not exhausted by options; futures (e.g., ICBIT) and leveraged CFD-style products (e.g., BTC.sx) can perform a similar function.
I would say the most accurate of "hedging" is to take an additional position that reduces your overall risk in the event that the price of a security moves against your favor, while still allowing you to profit in the event the price moves in your favor.
twiifm
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June 28, 2014, 03:53:03 AM
Last edit: June 28, 2014, 05:12:18 PM by twiifm
 #15

Theres no hedge for bitcoins.  Hedging is taking both sides of trade.

For example hold long bitcoin position.  Sell bitcoin call option.

Since theres no options market for bitcoin theres no hedge

Strictly speaking, hedging does not mean "taking both sides", it means taking positions which move in opposite directions -- such as in your example of a long position coupled with a short call against the position.

In addition, the list of types of positions which might move opposite to a long position in BTC is not exhausted by options; futures (e.g., ICBIT) and leveraged CFD-style products (e.g., BTC.sx) can perform a similar function.

"Taking both sides" & "taking sides of both directions" essentially mean the same thing.  Way to nitpick semantic to look smart.  Impressive

If the investor want hedging, then he wants to use options not futures.  

Buying bitcoin futures is not much different than buying bitcoin on margin.  Doesn't make sense for investors who want to hedge.  Buy bitcoin / sell bitcoin future.  If this is a 1:1 delta hedge is pointless.  If you think the bitcoin price will drop just sell your position b/c you achieve the same thing

It makes sense for miners though.  Mine bitcoin/ sell bitcoin futures @ todays spot price if you think price drops in future.

Also its retarded to hold a position w one broker and hedge it on another if you are an investor.  There will quite a bit of slippage trying to manage the 2 positions separately.

I trade options professionally but not futures so I won't comment about futures.  But I know its pretty common for futures traders use options to hedge their futures positions

have you used any of the 2 services you recommend?  Because BTC.sx doesn't even seem like a legit business.  They force you to register account just to peak at the website & the CEO only has one interview on youtube thats extremely vague and smells of marketing BS
DannyElfman
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June 28, 2014, 04:10:01 AM
 #16

Altcoins are NOT hedging -- you're just taking on WAY more risk. Gambling....

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DrGregMulhauser
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June 30, 2014, 09:17:33 AM
 #17

It's easy to tell you're relatively new here, twiifm, so welcome to the forum. A couple of quick clarifications:

"Taking both sides" & "taking sides of both directions" essentially mean the same thing.  Way to nitpick semantic to look smart.  Impressive

On the contrary, there's an easy avenue for misunderstanding here, since "taking both sides" frequently refers to literally taking both sides of a trade -- both buying and selling the same underlying entity, generally with a view to profiting on the spread between the two corresponding prices. If we were talking about arbitrage or about market making, this is exactly the phrase we'd be using. Given that your same post included obviously false statements such as "Since theres no options market for bitcoin theres no hedge", it's probably not hard to see how folks might misunderstand where you were coming from.

Buying bitcoin futures is not much different than buying bitcoin on margin.  Doesn't make sense for investors who want to hedge.  Buy bitcoin / sell bitcoin future.  If this is a 1:1 delta hedge is pointless.  If you think the bitcoin price will drop just sell your position b/c you achieve the same thing

On the contrary, as a general point there are plenty of ways to generate returns even with a delta neutral position, although in reality virtually nobody is going to maintain a fully delta hedged position in the Bitcoin space using the currently available services and tools. For everyone with significant experience in options trading, for example, the common candidates are theta and vega. For an example which is specific to the Bitcoin space and futures in particular, see Selling the Froth: A Simple Hedged Forex Strategy for Bitcoin-Denominated Returns.

Therefore, while your suggestion of simply selling BTC when you believe it will drop against fiat is actually a very good strategy, it seems to me entirely wrong to characterise delta neutral hedging as "pointless".

Also its retarded to hold a position w one broker and hedge it on another if you are an investor.  There will quite a bit of slippage trying to manage the 2 positions separately.

This is an interesting theoretical judgement, but investors who are more concerned with the actual returns that can be achieved will likely do exactly that when the prices suit them. This is analogous to how experienced options investors out there in the real world will route options orders to specific market makers using Level II quotes. In the Bitcoin space, using currently available services, slippage is a fact of life.

have you used any of the 2 services you recommend?  Because BTC.sx doesn't even seem like a legit business.  They force you to register account just to peak at the website & the CEO only has one interview on youtube thats extremely vague and smells of marketing BS

I was not recommending them, I was mentioning them as examples.

Of course I have used them, both in the course of managing the original BTC Growth fund, a 2000 BTC hedge fund-style service which operated last year, and a modest successor fund in forex, and in my own private trading.

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twiifm
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July 01, 2014, 02:19:28 AM
Last edit: July 01, 2014, 02:46:56 AM by twiifm
 #18

I just took a look at ICBIT.  A future (BUU4) is trading for $725 and spot price bitcoin on coin base is $645?  Seriously, how does that make sense?  $80 difference???  12% premium.  That is just BANANAS!

Buy bit coins and sell the futures if someone is dumb enough to buy it
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July 01, 2014, 03:26:24 AM
 #19

I just took a look at ICBIT.  A future (BUU4) is trading for $725 and spot price bitcoin on coin base is $645?  Seriously, how does that make sense?  $80 difference???  12% premium.  That is just BANANAS!

Buy bit coins and sell the futures if someone is dumb enough to buy it


Is it last transaction price? Do they have market maker there making the market?
twiifm
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July 01, 2014, 03:37:33 AM
Last edit: July 01, 2014, 03:53:54 AM by twiifm
 #20

I just took a look at ICBIT.  A future (BUU4) is trading for $725 and spot price bitcoin on coin base is $645?  Seriously, how does that make sense?  $80 difference???  12% premium.  That is just BANANAS!

Buy bit coins and sell the futures if someone is dumb enough to buy it


Is it last transaction price? Do they have market maker there making the market?

I don't know.  Never even heard about this ICBIT until the doctor brought it up.  Seems very dodgy though.  

I don't think theres a market maker because they give 80% discount on fees to provide liquidity i.e. making markets.  There's no liquidity and the price is all over the place.  

https://icbit.se/WebTrade/Trading.aspx

But seriously how can you lose money?  Buy some bit coins for $645 and sell the same qty in a futures contract for $725.  You collect 12% premium.  If the price drops at expiry you make a money + 12%.  If it goes over $725 you give the buyer your bit coins.  You still kept the 12% premium

Unless this place is a Mt Gox and you can't get you're  money out

To the DOCTOR..You said you used this service before.  What is your feedback?  You said you didn't recommend but why you bring it up in the first place?
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