Cryptocurrency risk problem
Many ICO companies raised a significant amount of capital through Ethereum, Bitcoin, or other cryptocurrencies in 2017 and 2018. The problem is that these firms need to meet the expenses of their projects by paying in fiat, like USD or EUR. This exposes that to high and unwanted cryptocurrency price risk.
Similarly, many crypto miners get most of their revenues by mining and potentially selling cryptocurrencies, but have to meet their electricity costs and operating expenses in fiat. These large crypto holdings expose them to significant crypto price risk and potential inability to meet their fixed and recurring expenses.
Crypto volatility
Cryptocurrencies are characterized by extreme levels of volatility compared to traditional asset classes like equities and fixed income. The average annualized volatility for Bitcoin is in fact around 80%, while for Ethereum is around 115%. Equity markets in comparison have an average annualized volatility level of around 15%.
Crypto drawdowns
Exceptional levels of volatility get reflected in cryptocurrency drawdowns. For example, an ICO company which would have raised Ethereum for their project in January 2018 would have seen losses of around 90% of the amount raised in crypto. This highlights the importance for these companies to adopt a crypto hedging program for their crypto treasury reserves with the objective of eliminitating crypto price risk or delivering uncorrelated positive returns on their crypto assets.
Crypto hedging program
By hedging their crypto exposure through a customized hedging program, crypto holders can almost eliminate the price risk and volatility of their crypto holdings and lock-in a fixed fiat amount. A hedging program in cryptocurrencies increases the probability that ICO companies and miners holding crypto reserves will be able to meet their expenses in fiat.
Disclaimer: these investment products involve substantial risks of loss. Figures and charts are purely informational and do not constitute an offer to sell a security or asset of any type. For more info, please contact us directly. No information on this page or website constitutes investment, legal, or tax advice. No representations or warranties of any type are made or intended, and none should be inferred.
Program Highlights
| Program objective | Hedging crypto exposure / reduce crypto price risk |
| Cryptocurrencies | Top 15 by traded volume |
| Hedging programs |
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| Investment options |
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| Financial instruments |
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| Investment horizon | Client mandate |
| Hedged notional | Client mandate |
| Initial deposit | 20% - 50% hedged notional |
| Exchanges | Multiple cryptocurrency exchanges |
| Investment decisions | Fully systematic |
| Execution | Fully automated |
Hedging programs
Our clients can choose among 4 hedging programs depending on their objectives:
- Passive hedge: this program has the objective of eliminating crypto price risk through a full passive hedge on a certain amount of cryptocurrencies or notional defined by the client. This program is useful for ICO treasury managers who want to lock-in a certain amount of fiat currency to be able to meet their fiat expenses.
- Active hedge: this program has the objective of limiting downside losses in case of crypto price drops, and at the same time participate in upside potential price movements. This is accomplished by hedging only when the crypto price drops below a certain level or achieves a certain drawdown. The active hedging mandate parameters are specified by the client.
- Systematic hedge: this program has the objective of hedging only when crypto price is likely to go down using a proprietary systematic investment strategy used in our alpha products. This potentially allows the program to reduce losses for price drops in bear markets, while at the same time capturing upside potential of price increases in bull markets.
- Systematic long/short: the objective of this program is to deliver alpha and uncorrelated returns to the crypto markets. It uses a proprietary systematic long/short strategy that decides when to go both long and short uses advanced statistical techniques. Since the program can go short, it has the potential to take advantage of price drops and deliver positive returns in bear market conditions.
Disclaimer: these investment products involve substantial risks of loss.
Program implementation
The implementation of the hedging program is quite simple and consists in the following steps:
- Choice hedging program: we have an initial conversation with the client to define the hedging program (passive, active, systematic, etc.), the hedging instruments, and the crypto exchange to use in the program.
- Definition client mandate: the client defines the mandate parameters, including the fiat notional or crypto amount to hedge, initial margin deposit, and price levels and parameters for the active hedging program.
- Review the legal documents: the client reviews and signs the legal documentation regarding the program, including the dislosure document limited power of attorney, and subscription agreement.
- Open exchange account: the client opens an account on the crypto exchange, transfers the initially agreed deposit, and gives us the ability to trade.
- Ongoing monitoring: we constantly monitor the client account and take actions when needed to achieve the objective in the client mandate.
Disclaimer: these investment products involve substantial risks of loss.
Contact Form
For more information on our investment programs, fill out the form below or send an email at info@blueskycapitalmanagement.com. A member of our team will be in touch with you shortly.