TAIL RISK HEDGING FOR BITCOIN

Today I want to discuss how we implement Tail Risk Hedging (TRH) programs for our clients and the opportunities these strategies present.

What is TRH: As we look at a bell-shaped distribution curve, we refer to the ends as the “tails.” This piece is focused on the left-hand side of those curves, or the negative outcome side. TRH is focused on mitigating the extreme moves markets tend to go through, which can have a devastating impact on portfolio returns.

Which clients is TRH relevant for: The obvious clients that should have an interest in TRH are of course Crypto Funds and Miners, but maybe less obvious is Venture Funds. We think Crypto VCs are perfect candidates for implementing a well-constructed TRH program as an overlay strategy to their often-illiquid long-term holdings.

What has experience taught us: The only thing that goes up in a down market is correlation; in our view, extreme volatility days tend to cluster, which is exactly what we are seeing now with all asset classes because of the COVID19 crisis.

We still maintain BTC is a critical strategic component of any well-constructed portfolio. The long-term risk-reward profile is more favorable than ever. However, as we watch WTI trade in UNPRECEDENTED negative territory I would immediately take tactical defensive action. That means insuring you have downturn protection until one gets better clarity on what the implications are from a macro standpoint. If there is literally NO demand for crude and we have no storage, we are facing a profound SHOCK to the global financial system. We do not see this situation in WTI being magically resolved over the next 30 days. There is never one cockroach….BE PREPARED FOR MORE NEGATIVE ECONOMIC NEWS!!!

How can clients implement this: The one strategy I would like to specifically identify is buying puts or put spreads. Because TRH programs are bespoke, it is important for us to understand our clients’ objectives, so we strongly encourage anyone interested in learning more to reach out and have a comprehensive discussion with us to determine how best to achieve your goals. We will be publishing a comprehensive technical piece around TRH construction later today.

What is the cost: There is a cost (similar to buying insurance), but this is a tremendous opportunity to capture Alpha! Losses will be mitigated when the inevitable market shock does occur, and if structured properly, this will allow our clients to buy assets at fire-sale prices. As I often tell my team, I am always looking to “throw downfield.” I welcome the opportunity to build a business in a market downturn because I know it will be that much stronger when we ultimately emerge from severe market dislocations. Don’t be a participant in a market panic — be an opportunist. As Buffett says, a crisis is a terrible thing to waste!

And yes, BitOoda uses TRH ourselves. I like to say that we always eat our own cooking and like to ask the question DOES ANYONE WASH A RENTAL CAR??

Good luck trading and please reach out to us to discuss in further depth

Tim

A global digital asset financial technology & services platform providing next-gen risk management solutions, best-execution brokerage & expert market analysis.

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