-
Bitcoin price fell 27% in less than a week.
-
Bitcoin’s unusual price volatility was caused by forced liquidations by investment giants like BlackRock and Sequoia Capital.
-
During times of bitcoin downturns or high volatility environments, it is important to use crypto insurance products.
Recent news is talking a lot about the collapse of FTX, a giant in the cryptocurrency market that until recently was one of the TOP 3 crypto exchanges in the world with a valuation of over $30 billion. After a series of negotiations with Binance, the company eventually filed for bankruptcy. There was no way that such an event would not affect the market as a whole. As a result, over the past week, bitcoin has fallen 27% from $21,500 to $15,700 – its lowest mark since 2021.
Cointelegraph reports that Sam Bankman-Fried, the founder of FTX, managed his trading firm, Alameda Research, using the wealth of FTX clients. In addition, Alameda Research reportedly had $8 billion in liabilities. As Bitcoin is used as general collateral for various cryptocurrency contracts, such as DeFi contracts on FTX, it has also been impacted and has been one of the top losers in the crypto space.
In addition, Bitcoin’s volatility and price were affected by liquidity shortages and forced liquidations (since its Value at Risk was at a critical level) by investment giants such as BlackRock, SoftBank, VanEck, Sequoia Capital or Ontario Pension Fund, all of which invested in FTX .
Continuation of the crypto winter
Since the beginning of 2022, Bitcoin is down 67%, crushing people’s hopes of a reversal and an end to the crypto winter anytime soon. Since the highs last November, Bitcoin is down more than 78%. The total crypto market capitalization suffered a loss of nearly $2.2 trillion and Bitcoin volatility surged by more than 50%.
People are scared of entering the industry and don’t want to risk losing their money, especially with the looming fear of a recession. But how can investors protect their wealth?
Insure crypto price behavior
There are a number of tools and strategies that an investor can use to hedge risk and protect against loss. Futures, swaps or options are generally considered good instruments. But in this article, I want to highlight another, arguably simpler, tool – crypto price insurance.
This type of insurance provides an opportunity to protect the user’s digital assets from adverse price movements and swings in market volatility. In general, it works like this: After purchasing a cryptocurrency (Bitcoin, Ethereum, Ripple, Solana, etc.), the investor can enter into an insurance contract for a suitable period of time, insure a desired amount of digital assets and a specified price at which the assets be insured.
When the insurance contract expires, the service provider will appraise the value of the investor’s digital assets according to the current market rate. If the rate turns out to be lower than the price at which the investor originally bought and insured their crypto, the provider will make up the difference.
In summary, crypto price insurance is a tool quite similar to traditional options, just with some flaws ironed out. Because the provider company handles the heavy lifting, users don’t have to personally cover their risks, making the whole process much easier and smoother.
In addition, companies can offer insurance coverage over different assets: cryptocurrencies, tokens, USDT stablecoin or even fiat currencies like USD or EUR. This type of versatility offers a major benefit, as it allows the user to choose their own preferred compensation method.
So, with such insurance, investors could survive Bitcoin’s recent drop without losing a penny.
Crypto insurance as one of the ways to beat the market
One of the most important aspects of portfolio management is combining assets that allow you to achieve the greatest returns with minimal risk. It is important to hedge your portfolio with various financial instruments during downturns or periods of high volatility.
Insurance services like the ones we’ve covered above can be a powerful way to attract more retail and institutional investors as they provide protection to make people feel safer in a risky environment. If price insurance becomes a basic service offered by a crypto platform on top of other products, it will be taken as a sign of a maturing digital asset ecosystem.
