Systematic Hedging of the Cryptocurrency Portfolio

Abstract

The article “Systematic Hedging of the Cryptocurrency Portfolio” on QuantPedia discusses a strategy for hedging a cryptocurrency portfolio that is stored in cold storage The article suggests that while cold storage has advantages, such as protection against hacking, it also exposes the holder to the price swings of the cryptocurrency market. The article proposes a hypothetical market capitalization-weighted Top 5 cryptocurrency index portfolio (T5) as a proxy for a portfolio that hardcore HODLers may hold. The rule for inclusion in the index is simple: each year, on the first day of the year, select the top 5 coins ranked by market cap for a yearly holding period. Stablecoins are excluded from the index. The article then explores a hedging strategy through BTC derivatives to minimize crypto market beta exposure risk. One approach introduced is a 1:1 (Proportional) Hedge, where the exact amount of $ value corresponding to Bitcoin (BTC) is shorted. The article suggests that this strategy can help mitigate the risk of price swings in the cryptocurrency market, especially when the market is at an all-time high. Please note that this is a high-level summary and for a detailed understanding, you should read the full article.